Sometimes a bid highlights some existing value that has been overlooked in a business. So, should I still add Micro Focus to my portfolio – or have I missed the boat?

Troubled history

The first thing worth noting is that despite today’s surge in Micro Focus shares, the longer-term picture is less rosy.

Even including the latest increase, over the past year the shares have risen just 18%. That means that, before the bid, they were lagging badly on a 12-month basis. Looking at the past five years, the shares have lost three-quarters of their value. Seen from yesterday, today’s share price looks great. But seen from the perspective of a long-term shareholder, even the bid premium cannot disguise how value-destroying it has been to own Micro Focus shares.

Micro Focus bid

In fact, I think that helps explain why the bidder has offered such a high price premium. The premium of around 98% to yesterday’s closing price means that Canadian bidder Open Text is offering to pay almost double the share price of 24 hours ago.

A takeover bid premium is common, as it helps persuade shareholders to part with their stock. But a 98% premium is unusually high. I think it is an acknowledgment of the fact that Micro Focus shares have been on a long, slow decline in worth over the course of many years. The bidder presumably hopes shareholders will see the offer as generous and therefore accept it.

Deal or no deal

I think there is a fair chance the deal will go through given the terms of the offer, which Micro Focus’ board of directors is recommending.

It is possible that a third-party bidder could emerge, which might push the price up further. Then again, at the time of writing, Micro Focus shares are actually trading at a slight discount to the offer price of £5.32 a share. I would not buy shares simply in the hope of a higher offer, as that is trading not investment.

Instead, I would consider the fundamentals of the investment case for Micro Focus shares from first principles.

My move on Micro Focus shares

I had already been eyeing Micro Focus shares in the past year. Even now, after today’s price jump, they have a yield of over 4%. If I had bought yesterday I would be in line for an 8% yield and perhaps now a large takeover premium to boot.

What concerned me about Micro Focus as a candidate for my portfolio was the business performance. Revenues fell at the interim stage and net debt stood at $3.7bn. The takeover could help resolve the company’s debt problem and I therefore see a logic for it. But I chose not to invest in Micro Focus a few months ago based on the business fundamentals. Doing so now the Micro Focus shares have jumped dramatically would be illogical for me.

The post Micro Focus shares have soared 90% today! Should I get in now? appeared first on The Motley Fool UK.

Although there’s a risk of falling into a value trap, I think now could be an excellent time to take advantage of discounts on offer. Here are two dividend stocks — one from the FTSE 100 and one from the FTSE 250 — that I consider oversold at present.

Taylor Wimpey

The Taylor Wimpey (LSE: TW) share price is down 35% in 2022 following a difficult six months for developers, including competitors Barratt Developments and Persimmon.

Since reaching a five-year high just before the pandemic crash, the FTSE 100 housebuilder has surrendered over half its gains. Nonetheless, with a 7.4% dividend yield, the current share price of 115p looks tempting to me.

The FY21 results showed a return to strength, albeit not quite to pre-pandemic levels. The company’s operating profit margin was 19.3%, up from 10.8% the year before. Group completions, revenue and pre-tax profit were all considerably above 2020’s figures, but slightly trailed where the business was in 2019.

One highlight for me is the growing cash position. Net cash has consistently risen over the past three years to £837m. In my view, this is good news for the company’s future dividend payments after they were suspended amid the Covid-19 uncertainty.

There are macroeconomic risks facing Taylor Wimpey shares. Interest rate rises are impacting the UK’s mortgage sector. Furthermore, due to a conveyancing logjam, the average completion time has soared to 22 weeks. A housing market slowdown could suppress the company’s share price growth over the coming months. Despite this, I’m still bullish on the long-term prospects for housebuilders.

Talk of 50-year mortgages might be part of the solution to the UK’s housing crisis, but a lack of supply remains the number one challenge in my view. This situation should benefit Taylor Wimpey in the years ahead. I’d buy this dividend stock today.

Micro Focus International

The Micro Focus International (LSE: MCRO) share price has also suffered this year, falling 38%. However, the juicy 8.7% dividend yield offered by this FTSE 250 software management business caught my eye.

The interim results for the six-month period ending 30 April revealed some weakness. Revenue declined 6.8% and adjusted EBITDA was down 9.5%. This caused some jitters, resulting in a 16% slump in Micro Focus International shares on results day.

However, it wasn’t all bad news for this company. A 5.3% fall in operating costs and a $545m reduction in net debt were positive signs for me. What’s more, the group’s policy of declaring a full-year dividend level that’s covered five times by adjusted profit after tax, as well as its strong cash flow generation should ensure future dividend targets are hit in my view.

The software provider has strategic relationships with Amazon, Alphabet and Microsoft. It assists thousands of customers in 180 countries in managing core IT elements of their businesses.

I believe a US stock market recovery could lead to further investment from US tech giants in their partnerships with Micro Focus International. I’ll buy before that happens.

The post 2 dividend stocks that are dirt cheap right now appeared first on The Motley Fool UK.

I’ve scoured the FTSE 250 index to find three dividend shares with 5%+ yields. A yield is calculated by taking the dividend cover as a proportion of the share price. Why am I adding these firms to my portfolio? Let’s take a closer look.

Dividend share #1: A FTSE 250 asset manager

Jupiter Fund Management (LSE:JUP) is an asset management business operating in the UK, Europe, and Asia.

It most recently had a dividend yield of 6.7%. This equated to dividend cover of around 17.1p per share. The current share price is 195.6p.

For 2021, the company increased profits to £216.7m. This constituted growth of around 21%, year on year, following the pandemic.   

Furthermore, the firm’s assets under management increased by around 3%. This gives me confidence given that competitors, like Ashmore, saw assets under management decline over the same period.

However, the business still had net outflows of £3.8bn, showing the continued impact of macro events on client demand.

Dividend share #2: Micro Focus International

Secondly, Micro Focus International (LSE:MCRO) is a software and technology services company. At the time of writing, it is trading at 381.1p.  

Its most recent dividend yield was 6.4%, or ¢29 per share of dividend cover. For the year ended October 2021, pre-tax losses narrowed to $517.8m from $2.9bn. 

As a potential investor, this gives me confidence that the firm is swiftly recovering from the struggles of the pandemic. It is important to note, however, that past performance is not necessarily indicative of future performance.

Despite this, revenue over the same period dropped by around 5%. This is something I would like to see improve in the near future.

Nonetheless, the business successfully refinanced about $1.6bn of debt on better terms. This should make the company more efficient in the future.

Dividend share #3: Moneysupermarket.Com

Finally, Moneysupermarket.Com (LSE:MONY) is a price comparison website for products like insurance. It currently trades at 171.2p.

It most recently had a dividend yield of 5.4% and dividend cover of 11.71p per share. While this yield is slightly lower than the previous two companies, it is still competitive.

For the three months to 31 December 2021, revenue from its money segment was up 37%, while the travel segment rose 796%, owing to increased international travel. 

Many believe that the firm will inadvertently benefit from the cost-of-living crisis, because more people will be using the comparison site to find the best deals to reduce their expenditure. 

However, investment bank Barclays reduced its target price from 260p to 220p in April, because it believes there is “more upside on several other stocks”. 

Overall, these three companies could provide me with a source of income alongside my growth stocks. In addition, each of the businesses look to be in better shape after the pandemic. I will be buying shares in all three firms soon.

The post 3 FTSE 250 dividend shares with 5%+ yields! appeared first on The Motley Fool UK.

Pubs are still struggling

FTSE 250 stock Mitchells & Butlers (LSE:MAB) is a pub company operating in the UK and Germany. Its well-known brands include All Bar One, Harvester, Innkeeper’s Lodge, O’Neill’s, Toby Carvery, and several more. The company also operates some property leasing.

It has a £1.9bn market cap compared with rival Whitbread’s £6.9bn market cap. It’s been burning cash at a rate of between £35m and £40m per month, and its debt costs it around £51m per quarter.

It’s widely expected that there will be a rush on pubs and social entertainment once the lockdowns are lifted. But it’s likely to take a long time before Mitchells & Butlers becomes profitable again. The Mitchells & Butlers share price has recovered 70% in a year and is up 30% in the past three months. While this shows confidence in the company, it makes me nervous and reluctant to invest. The Covid-19 situation is still bad in many parts of the world, and we’re not out of the woods yet. I think this stock could easily plummet again if the path out of lockdown is slower than anticipated.

Signs of growth in polymer demand

Polymer production company Victrex (LSE:VCT) has had an easier year than many companies, but Covid-19 still affected the business in the second half of 2020. Lower production led to higher costs, but 2021 is showing signs of growth. It’s cash strong with debt facilities available if need be.

Polymer demand depends on the market for plastics. This is not slowing down with considerable growth opportunity in emerging markets.

The Victrex share price is up 5.6% in a year and down 11% in the past three months. The FTSE 250 company reinstated its dividend in December after seeing a notable improvement in demand from the auto, electronic, and medical markets. Its dividend yield is 2.2%. It has a £1.8bn market cap and forward price-to-earnings ratio is 26.

However, profitability is likely to be slow and as it’s a globally facing stock, Covid-19 remains a threat to its success. I’m not confident enough to jump into this stock yet, but will keep it on my watch list.

FTSE 250 tech stock

UK tech company Micro Focus (LSE:MCRO) has done rather well since the pandemic hit. Its share price is up nearly 40% in a year and 15% in the last week. Its share price is close to its 52-week high and last week the company announced it’s partnered with US tech stock success story Snowflake to deliver data-centric protection to international clients.

It has a £1.5bn market cap, dividend yield is 2% and earnings per share are negative. I like a tech stock with a dividend, but I find the company’s very high debt levels concerning. And tech is a cut-throat industry with plenty of stocks to choose from. The sector has been on a tear through 2020 and is now falling out of favour with investors. Therefore, I’m not tempted to buy Micro Focus shares today, but will keep an eye on its progress.

The post Covid-19-hit FTSE 250 stocks that I’m avoiding appeared first on The Motley Fool UK.

What caused this recent surge? Why did the stock price fall in the first place? And should I be adding this business to my growth portfolio? 

Micro Focus’s land-sliding share price

Micro Focus is a software and technology company. It serves over 40,000 customers worldwide and provides software solutions designed to assist in operating digital infrastructure. This includes application delivery, cyber-security, and AI-driven analytics. It currently has a portfolio of over 300 products that suit the needs of various industries, including pharmaceuticals, aerospace, and telecommunications.

This vast collection of products has expanded over time, thanks to a series of strategic acquisitions. And at one point, Micro Focus was the UK’s largest technology company. So what went wrong?

Acquisitive growth strategies are risky and Micro Focus learned the hard way. In 2017 it completed the acquisition of Hewlett Packard Enterprise’s software business for $8.8bn. Unfortunately, the deal, which was supposed to propel Micro Focus into a new growth era, turned into a disaster.

The integration process was not as seamless as initially predicted and led to an additional $960m of exceptional expenses. What’s worse, since acquiring the business, total revenue has been declining at an alarming rate. Needless to say, this isn’t good news and appears to be the primary catalyst for Micro Focus’s collapsing share price. But is the company making a comeback?

Reasons to be cheerful

To fix the problems introduced with the Hewlett acquisition, the management team initiated a turnaround plan. Recently this has seemed to be having a positive effect. While total revenue is still falling, Micro Focus has slowed the fall faster than expected by analysts.

The firm reported a massive $2.97bn loss for 2020. However, $2.8bn of that was a goodwill impairment charge, confirming that it overpaid for the Hewlett acquisition. This is a one-time expense, and if its effects are ignored, the company is at a similar level of underlying profitability as 2019.

What’s more, its cash conversion ratio has increased from 0.95 to 1.13, indicating that internal investments are generating higher cash flows.

This is good news. I feel. And it makes the recent boost to Micro Focus’s share price understandable.

The bottom line

Overall, I think the worst might have passed, and it looks like the firm is finally getting back on track. Therefore, I believe the Micro Focus share price can continue climbing over the long term.

But there is still a problem that has yet to be resolved — its debt. Today, the market capitalisation of Micro Focus is around £1.7bn. But its total debt sits closer to £4.9bn courtesy of the Hewlett acquisition. While the next loan maturity isn’t due until June 2024, that is still a massive bill that the company might struggle to pay in its current state.

And so, for now, I’m going to wait and see how Micro Focus performs in 2021. Therefore, I’m not adding the stock to my portfolio today.

The post Can the Micro Focus share price keep climbing? appeared first on The Motley Fool UK.

Tom Rodgers: Open Orphan

Investing in Open Orphan (LSE:ORPH) was definitely a departure for me. At the time, the AIM-listed contract research firm had zero profit, zero dividends, and a sub-£50m market cap. But it’s been my best performer of 2020 by far, up 369% at the time of writing.

I think 2021 is going to be transformative for the world leader in the testing of antivirals and vaccines. With a £175m market cap at time of writing, Open Orphan turned profitable in Q4 2020. Revenue from providing human challenge studies to global pharma companies is expected to hit £38.3m in 2021. And two special dividends are on the cards: first from the NASDAQ spin-out of Imutex and second from the sale of wearables data to tech giants like Apple or Amazon. With a forward P/E of 9.9 and expected forward EPS growth of 1,030%, there’s huge value here. I’m doubling down for 2021.

Tom Rodgers owns shares in Open Orphan.

Rupert Hargreaves: Natwest

Natwest (LSE: NWG) has been one of the worst-performing stocks in the FTSE 100 during 2020.

However, the company’s underlying fundamentals appear to be much stronger than the share price implies. Profits are expected to leap in 2021, hitting £1.4bn as the economic recovery gets underway.

A sound capital position also makes the firm a strong dividend candidate. Estimates suggest the bank could return £7bn of excess capital to shareholders, a third of its current market cap. Management should provide investors with further information on this cash return in the new year.

With the stock trading at a price-to-book (P/B) ratio of around 0.5, now looks to me to be a good time to buy.

Rupert Hargreaves does not own shares in Natwest.

Alan Oscroft: Boohoo

After years of watching, I’ve finally bought Boohoo (LSE: BOO) shares. I’ve followed this growth stock through ups and downs, but always shied away and gone for my favourite dividend shares instead. But after 2020, I really don’t care about short-term volatility. And through those share price gyrations, Boohoo earnings growth hasn’t faltered.

Looking to the 2021-22 year, forecasts suggest a forward P/E of 28. That’s way below levels Boohoo shares have reached during the past five years. If Boohoo can keep those earnings growing, I think that valuation will come to look very cheap. I’m bullish about UK shares in 2021 in general. And though anything could happen in the short term, Boohoo is the share I have the best hopes for in 2021.

Alan Oscroft owns shares of boohoo group.

Karl Loomes: BP 

This year has been a rough one for oil majors, but I think BP (LSE: BP) could be a big winner in 2021. The pressure on oil prices form travel bans should ease as vaccines start to get things back to normal. 

The oil market does have a lot of spare capacity, which is keeping BP’s share price subdued. However I think OPEC and Russia particularly will be making efforts to prop the price up. BP doesn’t need oil to be back at $100/bbl to make money. 

Though BP has cut its dividend, even its current payout offers a yield of about 8%. Now may be the perfect time to lock this in. What’s more, I think as the market returns to normal it should increase this back near previous levels. 

With its commitment to green energy likely setting up its long-term future, for me I think BP could be seeing a good year in 2021. 

Karl has shares in BP.

Jabran Khan: Sage Group

Sage Group (LSE:SGE) is a world leader in accounting and bookkeeping technology for SMEs, and a great defensive stock in my opinion. Technology stocks weren’t considered defensive investments in the past, but the Covid-19 pandemic has reinforced technology’s fundamental role in our personal and work lives.

Sage recently reported favourable full year results, which were ahead of expectations. It announced it is committed to diverting 3% of profits towards future growth, which I like the sound of. I feel there is a sense of short-sightedness from the market’s reaction about the future growth, which has kept the Sage share price lower than expected. 

With Sage’s share price down over 20% in 2020 to date, I believe there is an opportunity to buy into a high-quality, established industry leader at an enticing price point.

Jabran Khan has no position in Sage.

Kirsteen Mackay: Micro Focus

On top of the pandemic, Brexit is weighing heavily on Britain’s economy. But lawmakers are hoping its long-standing credibility as a centre of finance, will help it rise from the ashes, renewed and invigorated. There is also pressure on the UK to produce its own stellar tech companies. For this reason, I think both financial and tech stocks will do well in 2021. 

I like the look of enterprise software company Micro Focus International (LSE: MCRO). Although it’s not a financial company it does help financial businesses upgrade and streamline their IT. The FTSE 250 company has had a tough few years but it’s recent trading update shows signs of recovery. Micro Focus also specialises in helping companies strengthen their security. Cyber-attacks have increased in 2020 and I expect this will continue to be an area of growth. I think Micro Focus’s services will be increasingly in demand during 2021.

Kirsteen Mackay does not own shares in Micro Focus.

Christopher Ruane: S4 Capital

My top share for 2021 is one I think can double in price (again): S4 Capital (LSE: SFOR). So far in 2020, it has more than doubled in price. That reflects the stellar growth the digital media agency has clocked up.

The pandemic has accelerated the shift online for many advertisers, so S4 Capital’s network of companies is in the right place at the right time. The chief executive built WPP from the ground up and is repeating the proven approach at his latest company. Bringing different parts of the digital offering under one umbrella is attractive to large clients who want a single point of contact. Recent account wins such as BMW and Mondelez provide proof of the concept. With plans to double revenue and profits in just three years, the company has had a strong year. I think 2021 will be at least as strong.

Christopher Ruane has shares in S4 Capital.

Zaven Boyrazian: Keywords Studios

2020 has been an excellent year for video game studios. With everyone stuck at home during the lockdown periods, the average person spent nearly 13.5 hours each week playing video games – a 16% increase since 2019.

While this is undoubtedly a temporary boost, it has exposed more people to the entertainment medium, which presents a unique opportunity for video game developers!

But making a video game is an expensive process that doesn’t always pay off. That’s why I think Keywords Studios (LSE:KWS) is one of the best gaming stocks out there. Instead of making and publishing video games, the firm offers premium services to other studios – services like art, programming, Audio Design, and just about everything else needed to make a game.

With a massive reputation for excellence and non-dependence on project success, Keywords Studios is perfectly placed to reap the benefit of a potentially £300bn industry by 2027.

Zaven Boyrazian owns shares in Keywords Studios.

Edward Sheldon: Clipper Logistics

My top share for 2021 is Clipper Logistics (LSE: CLG). It’s a fast-growing logistics company that offers a range of services to retailers. Its clients include M&S, John Lewis, and ASOS.

Clipper is benefitting from the online shopping boom in a big way. Its recent half-year results, for example, showed revenue growth of 20% and a 40% increase in earnings per share. Looking ahead, Clipper said that it remains positive about the longer-term outlook and that it believes the group is well positioned to achieve further growth both in the UK and internationally.

Clipper shares aren’t particularly cheap. However, they’re not overly expensive either. At the current valuation, I think there’s plenty of room for upside in 2021.

Edward Sheldon owns shares in Clipper Logistics and ASOS.

Paul Summers: Diageo

With 2020 proving just how unpredictable markets can be over a short period of time, I maintain that it’s best to simply buy and hold shares in great companies. As such, my choice for 2021 is identical to last year: premium spirit maker Diageo (LSE: DGE).

Naturally, the closure of bars, pubs and restaurants across the globe hasn’t been great news for the FTSE 100 giant. Nevertheless, the popularity and durability of its brands should mean this is nothing more than a temporary setback. Still generating income for holders, the shares remain 15% below their 2019 high at the time of writing. This opportunity won’t last forever.

Paul Summers has no position in Diageo.

Matthew Dumigan: Homeserve

After a brief stint in the FTSE 100, Homeserve (LSE: HSV) looks set for relegation after a poor share price performance over the last six months. It appears that investors have been prioritising undervalued shares over companies with stable earnings thanks to Covid-19 vaccine developments.

Nevertheless, I’m confident Homeserve shares are in for a bright 2021. After all, an outstanding performance throughout the year saw the group’s membership business sales rise by 8% year-on-year in the six months ending 30 September. On top of this, full-year pre-tax profit is still set to come in ahead of expectations.

Furthermore, the company spent around £47m on nine acquisitions in the first half of the year, which looks set to propel growth in my view. Not to mention the opportunities to expand further into the potentially lucrative US emergency home cover market, which could fuel significant share price growth in 2021 and beyond.

Matthew Dumigan does not own shares in Homeserve.

Jonathan Smith: THG Holdings

You may know THG Holdings (LSE: THG) as The Hut Group. It listed on the LSE in September, being the largest IPO on the exchange since 2013. Greater transparency of financial reporting shows the business is performing very well. Q3 results showed year-on-year revenue growth of 38.6%, with guidance that the full-year figures should show revenue of £1.43bn for growth of 25%.

Given this kind of growth is being delivered during a global pandemic, THG is a good buy for 2021 as a diversifying stock in my portfolio. The industry it operates in should continue to have strong demand regardless of what happens with Covid-19.

Jonathan Smith owns shares in THG Holdings.

G A Chester: Avon Rubber

Avon Rubber (LSE: AVON) isn’t the cheapest stock in town. But I reckon it has outstanding growth prospects for 2021 and beyond. 

The company recently sold its agricultural technology business. This leaves it focused on life-critical personal protection systems for the world’s militaries and first responders. It’s a leader in respiratory mask systems, ballistic helmets and body armour. 

Two acquisitions in 2020 have widened and deepened its relationships with the likes of the US Department of Defense and NATO. Its enhanced contract-winning opportunities, as well as its balance-sheet firepower to pursue further earnings-accretive acquisitions, make it my top stock for 2021. 

G A Chester has no position in Avon Rubber.

Manika Premsingh: Ocado

The FTSE 100 e-grocer Ocado (LSE: OCDO) has had a fantastic 2020. Its share price performance is impressive and its sales have shown a sharp ris,e too. But I think the best is yet to come for it.

If Brexit and the coronavirus vaccinations go smoothly, we are set for a pretty good 2021. Consumers will buy more, and increasingly from the likes of Ocado, having been introduced to online shopping because of Covid-19.

If there are disruptions, however, it’s still a good defensive stock that will appeal to investors, and it’s a protection from coronavirus too.

Beyond 2021, I believe Ocado will benefit as a market leader in the growing online segment market.

Manika Premsingh owns shares of Ocado.

Roland Head: ITV

2020 was a difficult year for television group ITV (LSE: ITV). But advertising revenue in the final quarter of the year is expected to be ahead of the same time last year. And programme production is returning to normal.

I think 2021 will be a turning point for this group that will see the business return to growth. ITV’s digital business is growing, and online revenues have risen in 2020.

The ITV share price has performed strongly since the start of November, but the shares are still priced at less than 10 times 2021 forecast earnings. I think that’s too cheap for a business with a track record of strong profitability and generous dividends. I expect ITV shares to beat the market in 2021.

Roland Head owns shares of ITV.

Harshil Patel: Sylvania Platinum

Sylvania Platinum (LSE: SLP) is a low-cost producer of platinum group metals (PGMs), which are platinum, palladium, and rhodium. It operates from South Africa, which is where the world’s greatest source of PGMs is located.

It benefits from strong metal price trends and limited competition. Sylvania Platinum is also a play on a shift to cleaner, more energy-efficient vehicles.

As a global economic recovery looks likely in 2021, demand for commodities could be robust. Supported by ample liquidity, central bank stimulus, and rising demand for PGMs, Sylvania Platinum could be in a sweet-spot.

Sylvania Platinum shares look cheap, trading at a price-to-earnings (P/E) ratio of just 4.3 at the time of writing. It also has growing revenues, rising profits, and no debt. It’s a well-managed, cash generative company that I think could be a top performer in 2021.

Harshil Patel owns shares in Sylvania Platinum.

Royston Wild: JD Sports Fashion

At the time of writing, there is still huge uncertainty over the economic outlook for 2021. Things remain particularly perilous for those involved in the retail sector as a blend of fresh Covid-19 lockdowns and weak consumer confidence remains a strong possibility in the new year.

The outlook isn’t all grim for Britain’s retailers, though. Indeed, I reckon JD Sports Fashion (LSE: JD) could be a standout performer in 2021. The athleisure and loungewear markets are red hot and are expected to grow by nearly 10% in the coming years. It’s a trend that this FTSE 100 share, with its huge ranges of cutting-edge and exclusive products, is in prime position to exploit.

Finally, and critically, JD Sports has invested huge amounts in its digital channels and its warehousing capabilities to ride the e-commerce boom. This sets it up nicely for what will prove to be another huge year for internet shopping. City analysts reckon JD Sports will report an exceptional 59% rise in annual earnings for the fiscal year ending January 2022. And this leaves it trading on a rock-bottom forward price-to-earnings growth (PEG) ratio of 0.4.

Royston Wild does not own shares in JD Sports Fashion.

The post Top British shares for 2021 appeared first on The Motley Fool UK.

So what precisely is driving this momentous rise in the Micro Focus share price?

Micro Focus soars

The latest hike comes off the back of some brilliant news for long-suffering shareholders.

The Micro Focus share price surged on Thursday 3 December when Amazon named it as one of four businesses approved to help companies move across to Amazon Web Services (AWS).

AWS is Amazon’s pay-as-you-go cloud computing platform and is one of its fastest-growing departments. It accounts for 14% of Amazon’s hundreds of billions in annual revenue.

In a blog post on the AWS website the US giant provided a glowing review of the FTSE 250 company. Amazon explained how Micro Focus provided the ‘deployment environment’ software to move Kmart Australia’s merchandise system onto AWS. “The project met objectives for increased agility, cost savings with pay-as-you-go, and enhanced time-to-market,” it said.

To be chosen as an ‘approved competency partner’ for AWS does two things for the Micro Focus. It lends a huge amount of prestige to the company, and also suggests a positive outlook for the UK firm’s revenues in 2021 and beyond.

Regulatory no-show

Micro Focus didn’t make a specific announcement to the London market about this Amazon news. Normally when something happens that a company thinks will make a material difference to its share price, it is required to put out an ‘RNS’ or Regulatory News Service update.

There’s no record of this Amazon news in Micro Focus’s most recent trading statement from 18 November 2020. Nor is it in any of its RNS updates to the London Stock Exchange over the last two months. So it’s fair to say the announcement probably came as something of a surprise to the UK market.

It has taken a couple of days for the news of Amazon’s backing to filter through to investors. So that’s probably why the Micro Focus share price jumped another 15% on Monday 7 December.

Fallen star

There is one other good reason why the Micro Focus share price has jumped so much recently. It had fallen a lot! The jointly UK- and US-listed company could now be considered a turnaround stock. 

It’s not all been sunshine and rainbows for the Micro Focus share price in recent years. A series of operational missteps over the last three years has seen the share price dive from 2,600p to today’s price. And, despite the recent hike, the company is only half as valuable as it was in January 2020.

Some investors fear that the future of the business is shaky because it uses a huge amount of debt. As of 31 October 2020, net debt stands at $4.2bn, far more than its market cap. And this puts intense pressure on the balance sheet. This likely weighs on investors’ minds.

But contrarian buyers who follow Warren Buffett’s strategy of buying value stocks will now have the Micro Focus share price on their radar.

As the billionaire investor famously said: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it’s marked down.”

The post Why the Micro Focus share price is up 100% in 30 days appeared first on The Motley Fool UK.

Is this the start of a stunning comeback for this former FTSE 100 share, which was valued at more than £10bn a few years ago?

I certainly think that Micro Focus shares should be worth more. However, I do think there are a couple of risks that may limit the eventual value of this business.

Gaining pace?

On 18 November, Micro Focus gave a trading update for the year to 31 October. The company said that revenue for the year would be around $3bn, but that profit margins would be “towards the upper end of management expectations”.

The news sent the Micro Focus share price up by 30% on the day. The stock has since risen by another 40%, as investors buy in to CEO Stephen Murdoch’s vision of a more efficient and focused business.

It’s still early days, as the company is less than one year into Mr Murdoch’s three-year turnaround plan. But with the shares trading on just four times forecast earnings for 2021, I think there’s still room for further gains.

What I’d watch

As I mentioned, I have a couple of concerns about Micro Focus shares.

The first issue is that this business isn’t showing many signs of growth. Although this is a software business, its main activity is helping companies maintain and develop older IT systems. Often, this includes digital transformation. Mostly, this means making old tech work with modern online services.

The last time the company reported any sales growth was 2018. Since then, revenue (reported in dollars) has fallen from $4.754bn to about $3bn in 2020. The latest broker forecasts for 2021 suggest that revenue will slip lower again next year, to $2.834bn.

Businesses that are in decline generally attract low valuations, even if they remain profitable. Mr Murdoch hopes to return Micro Focus to growth. I think there’s a good chance he’ll succeed, but it’s not a certainty.

Micro Focus share price: don’t forget debt

If the shares continue to trade at current levels, I wouldn’t be surprised to see Micro Focus become a bid target. But anyone buying the company would need to buy its debt as well as its shares.

The group had net debt in GBP of £3.2bn at the end of October. Adding this to the Micro Focus market cap of £1.7bn gives a total value for the business of about £5bn. This is known as the enterprise value — it’s the total commitment someone buying the whole company would have to make.

How much is Micro Focus worth? I can’t say for sure, but I believe that even with the current debt load, this business is worth more than the current share price suggests.

So, I’d hold the stock at 500p and monitor the performance of the business as we head into 2021. I think there could be more to come from this turnaround.

The post The Micro Focus share price has doubled in a month. I’d keep buying appeared first on The Motley Fool UK.

They’re all companies I’ve considered buying in the past, but after such rapid gains, should I wait for better buying opportunities?

This tech stock looks cheap to me

The first company on my list is FTSE 250 software group Micro Focus International (LSE: MCRO). As I discussed in November, Micro Focus has been through a tough period over the last few years.

Its share price has fallen by 85% in three years and its market-cap is now just £1.2bn. However, the firm’s latest trading update caused the shares to soar. I was impressed too — I reckon this business might be starting to turn the corner.

The company’s high debt levels and falling sales still worry me. But I think there are signs the numbers are moving in the right direction. It’s also worth remembering that the company is less than one year into a three-year turnaround plan.

The market isn’t convinced, and the stock currently trades on just three times forecast earnings. I think this is one UK share that’s too cheap. I may buy a few Micro Focus shares for my portfolio.

Will travel return to normal in 2021?

With vaccines on the horizon, bus and train operators will be hoping for a return to normal in 2021. Companies such as Stagecoach Group (LSE: SGC) have only survived this year thanks to massive government bailout payments.

I’ve steered clear of Stagecoach during the pandemic, but I’m starting to wonder if this UK share is now offering an opportunity.

I’d forget about the firm’s current financial year, which ends in May 2021. I expect the numbers to be terrible. But I’m interested in the potential for recovery in the 2021/22 financial year.

Broker forecasts currently suggest Stagecoach could generate adjusted earnings of 7.8p per share in 2021/22. If correct, that would price the stock on less than eight times forecast earnings.

The outlook is still uncertain for Stagecoach, but I reckon the worst might be over. However, I won’t be buying this UK share. One lesson I’ve learned this year is that I prefer to own shares in companies which have more control over their own destiny.

The best UK share you can buy?

Airline and package holiday group Jet2 (LSE: JET2) has also suffered this year. But founder and chairman Philip Meeson owns almost 30% of the business. Meeson took early action strengthen the group’s finances and protect his life’s work.

As we head into 2021, I expect Jet2 to reap the rewards of this prudent management. Analysts expect the group’s sales and profits to bounce back very strongly from April onwards.

That’s a view I share. By then I hope that vaccinations will be gathering pace and the pandemic will be easing. I suspect that demand will be high for affordable summer holidays. These are Jet2’s core product.

The only thing I don’t like about Jet2 is its share price. The shares have doubled since the start of September. At over 1,400p, the price represents 19 times 2021/22 forecast earnings. That seems quite high to me. But I’d still like to own Jet2 shares.

The post These UK shares are up over 60% in a month. Here’s what I’d do now appeared first on The Motley Fool UK.

The Micro Focus share price has fallen by nearly 90% from its 2017 high of 2,697p, so today’s news is a welcome boost for shareholders.

Even after today’s gains, Micro Focus shares trade on just 2.5 times forecast earnings. Should I buy into the turnaround story at this large UK tech stock?

Signs of progress?

Chief executive Stephen Murdoch says that revenue is expected to be about $3bn this year, in line with broker forecasts. However, profit margins are now likely to be “towards the upper end of management expectations”. Mr Murdoch expects to report an adjusted EBITDA margin of 39%.

This measure of profit excludes some cash costs, including tax and interest payments. But I think adjusted EBITDA can be a useful measure of the approximate cash profit generated by a company’s operating business.

Based on today’s update, my sums suggest that Micro Focus should generate adjusted EBITDA of around $1,170m for the 2019/20 financial year. That’s about 15% less than last year.

Falling profits are never ideal, but Micro Focus is only nine months into a three-year turnaround plan. Mr Murdoch believes that the group is making good progress and delivering “encouraging early results”.

It’s not all good news

Micro Focus specialises in helping companies adapt legacy computer systems to meet modern requirements. It’s a surprisingly large and important business — behind their flashy websites, many big companies still depend on ageing back office systems.

In past years, the group grew by making regular acquisitions of smaller rivals. Things went well until 2017, when the firm bit off more than it could chew with an £8.8bn deal to buy Hewlett Packard‘s software business.

It’s been downhill since then. The Micro Focus share price crashed in 2018 when management owned up to problems integrating the HP acquisition, which also left the group with a hefty debt burden.

Will the Micro Focus share price bounce back?

I don’t think Micro Focus shares will ever return to 2,000p and above. But I do think they are probably cheap at current levels.

The biggest problem that I can see is that both revenue and profits are falling. Broker forecasts suggests this will continue next year. In my view, Mr Murdoch needs to stop this decline while continuing to reduce the group’s $4.2bn net debt. If he can do this, then a return to dividends may be possible.

Right now, Micro Focus shares are unloved by the market. The stock’s forecast price/earnings ratio of 2.5 is cheap, but I think it’s also a warning.

This business could continue to decline. With so much debt, shareholders could get squeezed out and be left with nothing.

I don’t expect that to happen. I’m feeling more positive about Micro Focus than I have done for a couple of years. I’ve added this stock to my watch list for further research. I might consider a small buy for my portfolio.

The post Will the 346p Micro Focus share price ever go back to 2,697p? appeared first on The Motley Fool UK.