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Why Imagination Technologies Group plc soared by a quarter today

Shares in Imagination Technologies (LSE: IMG) have soared today following a positive update. It shows that the company is really getting to grips with its turnaround plan and while there’s still some way to go, it’s on track to deliver on its long-term potential. However, is it worth buying after today’s sharp rise, or should you look elsewhere for better value for money?

An improving business

Following a challenging period, Imagination Technologies is in the process of restructuring. Today’s update shows that this is nearing completion, with Pure and most of IMGsystems now sold, while IMGworks is nearing disposal. This should leave the business in a much more streamlined and efficient state, which may lead to improved profitability ahead.

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In addition, today’s update shows a return to profitability. Continuing operations adjusted operating profit rose by 65% to £12.2m, while continuing operations reported operating profit was £2.9m in the first half of the year versus a loss of £5.5m last year. This was aided by annual cost savings of £27.5m, while total partner shipments were in line with expectations. This boosted revenue from continuing operations by 6% to £64.4m.

Outlook: bright future?

Imagination Technologies has a bright future. As mentioned, it still has some way to go before it returns to full financial health, but today’s update shows that it’s on the way to achieving this. In the 2017 financial year it’s due to record a rise in earnings of 35% following the anticipated return to full-year profitability in 2016. This puts it on a price-to-earnings growth (PEG) ratio of just 0.9, which indicates that the full extent of its turnaround potential hasn’t yet been priced-in by the market.

While Imagination Technologies has a bright future, it’s also a relatively uncertain one simply because of the changes taking place. More risk-averse investors within the technology space may wish to invest in a more stable business such as Micro Focus (LSE: MCRO). It has a strong track record of growth and its decision to purchase HPE should provide even greater diversity and resilience in future.

Micro Focus also offers income potential. It currently yields 2.8% and pays out just 44% of profit as a dividend. This indicates that it could increase shareholder payouts at a rapid rate and yet have sufficient capital with which to invest for future growth.

This compares favourably with Imagination Technologies, which is expected to yield 0.1% next year. However, the appeal of the company isn’t about stability or income. It’s a relatively high risk technology stock that offers strong earnings growth and an appealing valuation. While Micro Focus may have a better track record and lower volatility, it has a PEG ratio of 2.3. As such, Imagination Technologies may be the better buy, although both stocks remain sound buys for the long term.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. The Motley Fool UK has recommended Micro Focus. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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