Today, I’m on the hunt for technology stocks with the potential to deliver many more years of sustainable growth.
I’m looking for profitable mid-cap companies that still have room to grow. I don’t want businesses selling products that could fall out of fashion, or become redundant.
To satisfy these requirements, I’ve focused my attention on companies that provide the hardware and software infrastructure needed to run the internet.
Cyber security growth
The first company on my radar is “cyber security and risk mitigation” specialist NCC Group (LSE: NCC). This business provides the services and software needed to keep customer information safe, protect corporate networks from cyber attacks, and manage software development securely.
NCC went through a difficult patch in 2016 and 2017, but it now seems to be making good progress. Revenue from continuing operations rose by 8.3% to £233.2m last year, during which adjusted operating profit climbed 22% to £31m.
Adjusted figures can sometimes present an optimistic view of events. But in NCC’s case, last year’s numbers were backed up by free cash flow of £26m. This comfortably covered the dividend and allowed the group to substantially reduce its borrowing levels.
In a statement today, NCC chief executive Adam Palser said the firm was on track with its profit guidance for the current year. Analysts’ forecasts indicate that this should see the group’s adjusted earnings rise by about 10% to 9.2p per share. This puts the stock on a forecast P/E of 22, with a dividend yield of 2.4%.
I think the shares will soon grow into this valuation. Rising profit margins and strong cash generation tick my boxes, and I’m attracted to the fast-growing cyber security market. I rate NCC as a buy.
My top IT pick
This firm’s shares have risen by 128% over the last five years, versus a 16% increase for the FTSE 100.
However, since hitting a 52-week high of 1,632p in July, Computacenter’s share price has gone into reverse. The stock is now worth 20% less than it was two months ago. Why?
In July, the group upgraded its profit guidance for the current year. And in August, half-year results confirmed this revised guidance, and revealed a 24% increase in half-year adjusted pre-tax profit.
What may have caused the shares to fall is the warning from chief executive Mike Norris that growth during the second half of the year may be slower, relative to 2017. Another potential concern was Norris’s comment that “it is impossible to predict how long these buoyant market conditions will continue.”
Don’t under-estimate this company
Norris is right to point out that rapid growth in demand for cyber security, network capacity, and cloud computing facilities, has driven strong growth for his firm.
However, I don’t see the risk of a slowdown as a reason to avoid this stock. Computacenter generated a return on capital employed (ROCE) of 26% last year and returned £100m of surplus capital to shareholders. These are impressive figures.
The firm appears to be on track to deliver continued growth this year. In my view, this performance comfortably justifies the stock’s forecast P/E of 18 and 2.3% yield. I’d be a buyer at this level.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of NCC. 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.