It’s no secret that growth-focused investors often gravitate towards companies whose earnings rise at double- or even triple-digit rates. Let’s face it, what could be more exciting than a hot growth stock whose profits climb at breakneck speeds year after year? But watch out, explosive growth can be unsustainable over longer timeframes.
The tortoise and the hare
That’s why it’s sometimes better to look for slightly slower, more reliable growth – the story of the tortoise and the hare comes to mind here. These types of stocks do tend to be a little dull, but when it comes to investing it’s often said that boring can be beautiful. For those who are risk-averse, companies delivering steady sustainable growth can be much more appealing than explosive growth stocks that come with sky-high expectations.
Accountants have always been viewed as boring but well paid. Similarly, accounting software specialist Sage (LSE: SGE) certainly isn’t the most glamorous company to have graced the FTSE 100, but it certainly knows how to generate copious amounts of cash.
Sage may not be a household name, but the Newcastle-based software giant happens to be the market leader for integrated accounting, payroll, and payment systems, supporting millions of small and medium-sized businesses right across the globe.
2017 marked the completion of a significant transformation for the group, and with the focus shifting to subscription-based services, recurring revenue now accounts for 78% of total revenue with software subscriptions representing 37% of total revenue, up from 22% in FY2014. For me, this level of predictability makes the company very attractive from an earnings visibility perspective.
Sage’s shares have pulled back a little from January’s multi-year highs of 821p, and now trade on a price-to-earnings ratio of 21 for the year to September.
Perhaps a little more familiar to those outside the investment community is Sage’s FTSE 100 peer Experian (LSE: EXPN), the world’s leading global information services company.
The Dublin-based group which specialises in financial and personal credit data, is the best known name in this area as far as most consumers are concerned and continues to hold a dominant position in its market. But it’s also seeing further steady expansion into emerging markets and new products in areas such as fraud, health and analytics.
Results for the third quarter showed good progress with organic revenue growth of 5% and total growth of 8%. Performance across business-to-business activities (which consists of Credit Services, Decision Analytics and Marketing Services) strengthened, with Consumer Services making good progress in identity protection and credit comparison services.
City analysts expect the group to post revenues of almost £3.4bn for the current financial year which ends this month, with profits forecast to rise by 8% to £629m, putting the shares on a forward earnings multiple of 23. Certainly not cheap, but it’s a price investors should be prepared to pay for REAL quality.
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Experian and Sage Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.