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Why I’d pile into this plunging share price today

There’s nothing quite like a plunging share price to get the old value-receptors twitching, so let’s take a closer look at Oxford Metrics (LSE: OMG), the international software company servicing government, life sciences, entertainment and engineering markets.

The firm delivered its half-year results this morning and, as I write, the stock is heading towards being 10% down on the news.

Great figures

Before even looking at the results, I reckon it’s fair enough that the share is being marked down just for being another with ‘Oxford’ in its name. How are we poor investors, and all the potential customers, supposed to tell one company from another? What some of these outfits need more than anything else is a lesson in branding, in my view.

There’s more leverage to be had than by simply naming an enterprise after the place it was started – especially when so many businesses come from a big city such as Oxford! Richard Branson, for example, found his inspiration from other sources when naming his companies, and things worked out well for him.

Yet despite today’s plunge in the shares, the figures are rather good. In the six months to 31 March, revenue rose almost 13% compared to the equivalent period a year earlier, and earnings per share shot up just over 48%. The success translated into a rising cash balance, with net cash lifting almost 19% to a smidgeon below £11m. I think a building cash balance is undeniable evidence that an enterprise is succeeding.

A positive outlook

Chief executive Nick Bolton said in the report the positive start to the year was driven by the company’s Vicon division, which secured deals with NASA’s Jet Propulsion Lab and Square Enix. He reckons the outcome helps to consolidate the firm’s position of leadership in the engineering and entertainment markets. 

On top of that, Bolton revealed that the location-based virtual reality market is “really beginning to take off” this year. He reckons the scale of that market “is significant.” The firm’s partners are launching new locations “across multiple geographies,” he says, and the company signed an“exciting” new partnership agreement in the period with Sandbox VR.

Looking forward to the second half of the year, Bolton said the pipeline of sales for the Yotta division and Vicon “is strong,” which underpins his confidence the firm will perform“in line with market expectations for the full year.” City analysts following the firm have got estimates pencilled in for a percentage increase in earnings in the mid-to-high teens. For the following trading year to September 2020, the estimates I’ve seen are north of 30%, so expectations are high.

A fair valuation?

Indeed, Oxford Metrics is trading and expanding well and it operates in a profitable sector that I’m keen on. So why the weakness in the shares today? I think it is because high expectations lead to a high valuation, and any slight undershoot of some investors’ expectations could cause some of the froth to fly off the valuation.

However, today’s share price close to 90p throws up a forward-looking earnings multiple close to 18. Given the vibrancy of the enterprise, I think that’s fair and see the stock as ‘attractive’.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.