Spirent Communications (LSE: SPT) soared 15% on Monday morning on the release of a year-end trading update.
Spirent bills itself as “a leading test, measurement, analytics and assurance technology company,” and it provides tech services to firms involved primarily in the broadband, internet telephony and wireless applications markets.
Data and its analysis is key to online commercial success these days, and I think this kind of business is perhaps one of the best ‘picks and shovels’ ones to be in for the next decade. And Spirent is doing very well at it, with a 5.5% rise in revenue for 2019 to $503m.
Adjusted operating profit should be $91m-$93m, up nearly 20% on the 2018 figure. Analysts had a 6% rise in EPS down for the year, but that’s looking like an underestimate now.
On strategy, chief executive Eric Updyke said: “Over the medium term we expect to continue to deliver mid-single-digit revenue growth with a focus on increasing recurring revenue streams.”
I’m pleased to see the focus is a long-term one on those recurring revenue streams, as that should establish a solid cash foundation for the future. I’ve seen too many technology companies rush for the fastest short-term growth they can achieve, leaving themselves overstretched and set for a crash.
On valuation terms, we’re looking at forward P/E multiples of around 20, which I don’t think is too high at all for an attractive growth stock. Dividend yields of 2%-2.5% are testament to attractive cash flow at this stage too, and Spirent is set to end the year with net cash of $183m.
Saddled with debt
Ending the year with net cash on the books can be nothing more than a distant dream for BT Group (LSE: BT-A), which reported net debt of £6.1bn at the end of its first half at 30 September. The firm said the increase was “primarily due to implementation of IFRS 16,” plus the effect of net business cash outflows of £1.2bn.
And then there’s the BT pension fund deficit, standing at £5.5bn at the same time, and which has been hanging round the company’s neck for years.
The shares look cheap on the face of it, on a forecast P/E of only around eight, but those large debts take away a lot of that attraction. As a proportion of market capitalisation, the debt is growing as the share price falls.
BT shares reached a recent peak in 2015 at around 500p, but at just 190p today that’s a 62% fall, which is massive for a FTSE 100 company of BT’s venerability.
An upside of the price fall, however, is that it’s pushed up dividend yields for those who buy now. For the year to March 2020, the predicted 15.4p dividend (which has been held flat for several years) would yield a tasty 8.1%. And an expected cut in 2021 would still provide 6.2%.
But that’s another of my pet peeves — companies with huge debt paying big dividends. I’d really like to see BT rebasing its dividend, say to around 3%-4% on the current share price, and using the freed up cash to attack its borrowings instead. It might annoy investing institutions with their short-term outlook, but it would surely help in the long term.
No, BT doesn’t tempt me at all.
Alan Oscroft has no position in any of the shares 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.