Micro Focus International (LSE: MCRO) is the biggest loser on today’s FTSE 100 with the share price plunging 10% in early morning trading. This is quite a reversal for loyal investors, who have grown accustomed to the share price rising higher and higher. Should you take this opportunity to buy?
Under the microscope
Micro Focus International is a red-blooded five bagger, its share price up more than 500% over the last five years. The last year has been particularly enjoyable for longstanding investors, with the share price up more than 70% in that time. Berkshire-based Micro Focus, which specialises in breathing new life into ageing, retiring software, has been one of the top performing stocks on the index over the past decade, thanks to a successful strategy of reviving declining companies. Then it all went wrong today.
This morning it issued an update on trading performance for the year ended 30 April 2017, and its forthcoming merger with Hewlett-Packard Enterprise Company. There was nothing particularly devastating from Micro Focus itself, the company simply reiterated that it expects to report revenues within the range of management guidance of flat to minus 2% on a constant currency basis.
HPE Sauce
The HPE Software trading update caused anguish, with preliminary estimates suggesting its revenue was down approximately 10% year-on-year in the final quarter, due to declines in licence and professional services. HPE is expected to release full company results for the quarter ended 30 April 2017 in the coming weeks, when we should find out more. Micro Focus will issue its own preliminary results for the year to 30 April in July.
Micro Focus executive chairman Kevin Loosemore remained upbeat, as you would probably expect, talking up the benefits of the deal and pointing out that it has obtained all regulatory approvals and new debt facilities, and is set to fully implement the Micro Focus business model. He admitted the short-term decline in licence is “disappointing” but not unusual given the level of change being undertaken.
Into Focus
There doesn’t seem that much to worry about here. Micro Focus has an excellent track record over the last 10 years, something a 10% blip in one merger target is unlikely to derail. Remember, we are looking at a company that has just posted five consecutive years of double-digit earnings per share (EPS) growth. Yes, City analysts reckon EPS growth will slow to just 3% in the year to 30 April 2018, but it will quickly get back on track with a forecast 17% growth in the year that follows.
We are also looking at a company that can boast operating margins of 23.7%, that are forecast to rise even higher to 37%. It can also show off a return on capital employed of more than 130%. Investors might only wish this morning’s sell-off had been more dramatic, given that the stocks still trades at 17.9 times earnings. They can console themselves with a forecast yield of 2.8% and a progressive management attitude to dividend payouts.
Take action
The market seems to be coming to its senses, with the stock already recovering some of its losses as buyers are attracted by the new price. This opportunity may not last for long.