This FTSE 100 super stock is down more than 20% in July. Time to buy?

Things were going well for shareholders in FTSE 100 international software company Micro Focus International (LSE: MCRO). So well, that one popular share research website labelled it a ‘super stock’.

To qualify for that accolade, a company needs decent quality and value metrics, and good momentum in the share price, which is usually driven by positive momentum in the underlying operations of the business.

Ongoing indigestion from the HPE business

Indeed, the stock had been recovering after weakness induced by its 2017 problematic acquisition of Hewlett Packard Enterprises’ software business. But on 4 July, the shares began to fall. And on 9 July, the firm released its half-year results report for the six months to 30 April.

The adjusted figures revealed revenue down just over 5% compared to the equivalent period the prior year, but that outcome had been flagged previously so was known by the market. Diluted earnings per share increased just over 8.4% and net debt eased back by a little over 12% to $3,807.5m. There’s nothing much in the figures to explain the more than 20% drop we’ve seen in the share price in July so far.

Chief executive Stephen Murdoch said in the report the company is making progress with its “significant program of work” aimed at fully integrating the HPE Software business“through the sustained application of the Micro Focus business model.” The outlook is positive and in line with earlier guidance. City analysts following the firm expect earnings to advance around 10% for the current trading year to October, and 10% again for the year after.

As I see it, there’s nothing drastic in the report to change the case for investing in Micro Focus International, but it’s clear integrating the old HPE business is more of a mouthful than the management bargained for. There’s even a separate section in the narrative headed ‘integration update’, which reveals: “The complexities of the HPE Software business integration continue to require detailed attention and substantial programme planning and execution.”

However, the directors are “confident” the firm can deliver on its original thesis, which means making the enlarged Micro Focus “an efficient and optimised platform operating at scale with sector-leading margins and the opportunity to grow further through acquisition.”

Did these director share sales rock the boat?

My guess is the thing that rocked the boat was executive chairman Kevin Loosemore’s sale of 650,000 shares for around £11.6 m over the 10 and 11 July. A cynic might assume the move signals pessimism about the short-term outlook. But Loosemore said he wanted to diversify his investments because he is now 60 years old and had previously held all his wealth in Micro Focus shares. Even after selling, around half his “personal wealth remains in the stock.”

I’m inclined to take his comments at face value and don’t believe his selling is anything more than sensible portfolio management. Micro Focus International remains a decent turnaround and growth proposition in my eyes, and the market could just have handed us an opportunity to buy into the story.

The share price stands at 1,678p as I write, which throws up an earnings multiple just below 10 for the current year and a dividend yield close to 5.4%. I think that’s decent-looking value.