It’s not been a particularly pleasant year so far for holders of Sage (LSE: SGE) — the market leader in integrated accounting, payroll and payment systems.
Back in January, the £7bn cap FTSE 100 constituent announced that revenue growth in the first quarter of its financial year had stalled as a result of investment in staff training and poor performance in its French business. Last month’s announcement that organic revenue growth expectations for the year had been revised down from 8% to 7% only served to make investors more skittish.
Having already fallen 23% in a little over three months however, today’s positive reaction to the company’s interim results suggests that the worst may be over.
Organic revenue growth of 6.3% (to £908m) was achieved in H1, down from 7.4% over the same period in 2017. While Sage appears to be performing well enough in most of its markets, this figure was “around £5m” lower than expected according to CEO Stephen Kelly “due to slower and more inconsistent sales execution” than had been anticipated. He went on to remark that these issues were already being addressed and that the firm — through its Business Cloud platform — was now looking to increase recurring revenue over the rest of the year.
Elsewhere, profit before tax dipped 5% to £171m. Although a margin of 24.5% for the period was lower than in 2017 (25.3%), the company expects this to bounce back to “around 27.5%” for the full year and, as a result of further cost savings, to increase to “at least 30%” over the long term.
With shares up over 3.5% in early trading, it would seem that the market was expecting the news to be a lot worse than it was this morning. So is Sage now a buy?
Changing hands for 19 times earnings before today, the Newcastle-Upon-Tyne-based business isn’t exactly cheap to acquire. Nevertheless, the current issues faced by the company do have a short-term feel about them.
Although few income investors will be attracted to the forecast 2.6% yield, it’s also worth pointing out that Sage’s consistent history of hiking its payouts (including today’s 8.2% increase to the interim dividend) certainly isn’t indicative of a company in serious trouble.
The above, combined with the high returns on capital and sales that it has shown it is capable of generating in the past, leads me to think that now might be a good time to begin building a position.
Another heavy faller
Online fashion firm ASOS (LSE: ASC) has been another big faller over recent months — down almost 25% from the highs achieved in mid-March. While such falls are not uncommon in highly rated stocks, I think recent concerns over increasing capital expenditure might be overdone.
So long as you can look beyond the short-term impact on profits from the “substantial investment” (CEO Nick Beighton’s words) in people, technology and logistics the company is making, last month’s set of interim figures were still very encouraging. Sales growth of 31% (to £716.8m) from its international markets was a highlight, particularly with Brexit on the horizon.
Revenue for the current year is now expected to be around £2.47bn with analysts forecasting adjusted earnings per share of 96.4p for 2017/18. The resultant forecast P/E of 61 is likely to be too high for many investors but — as a long-term holding — I’d be prepared to buy the stock at this level.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.