As such, my caution over the past year about the valuation and prospects of the business has put me out on something of a limb. Have today’s results, and share price fall of as much as 5%, persuaded me the valuation and prospects are now more attractive for investors?

Merited premium rating

To put today’s results (for its financial year ended 30 September) into context, let’s go back two years to the company’s near-term expectations, medium-term guidance, and long-term aims for the business.

For its financial year ending 30 September 2018, it said it expected organic revenue growth of around 8% and an organic operating margin of around 27.5%.

At a subsequent Capital Markets Day, it issued “mid-term guidance that over the next three years, organic revenue growth will reach 10% on a sustainable basis and organic operating margins will be at least 27%.”

It also said: “Over the long term, Sage has an aim of achieving organic operating margins of at least 30%.”

At the time, its shares were trading at around 750p. This valued it at 22.7 times trailing earnings per share (EPS) of 33.1p. Certainly a premium rating, but arguably well-merited on its projections for impressive, double-digit revenue growth and high profit margins.

Well short of expectations

Sage’s performance in fiscal 2018 fell well short of expectations. The chief executive walked the plank before the year was out, and was replaced by the finance director. The company reported organic revenue growth of just 6.8% for the year.

The new boss gave no concrete guidance on organic revenue growth for fiscal 2019, beyond telling us the “rate may decrease in the short-term.” However, he said that due to “£60m of specifically targeted investment to accelerate the transition to SaaS … organic operating margin will be in the range of 23%-25%.”

Valuation

Today, Sage reported organic revenue growth of 5.6%, and an organic operating margin of 23.7%, having previously alerted the market in a Q3 update it would be at the lower end of the 23%-25% range. For fiscal 2020, management told us “organic operating margin is expected to be around 23%, as Sage continues to invest in the transition to SaaS.”

Two years ago, when the company was guiding on organic revenue growth reaching 10% within three years and organic operating margins of at least 27% (with a longer-term aim of at least 30%), the stock was trading at 750p and at 22.7 times earnings.

How’s the valuation looking today, with organic revenue growth running at 5.6% and margin guidance of 23% for fiscal 2020? The shares are dealing at 707p, which represents 24.9 times today’s reported underlying EPS of 28.4p.

As you can see, the stock’s earnings valuation is more elevated now than it was two years ago, when the market was pricing it for significantly stronger top-line growth and higher profit margins.

I believe the valuation is too high for the level of growth and margins it’s likely to offer going forward in an increasingly competitive market. At a sub-20 earnings multiple I might be interested, but at around 25 I’ll continue to avoid it.

The post Is this FTSE 100 stock owned by Terry Smith and Nick Train a screaming buy? appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!
• 2 beaten-down stocks I’m tempted to buy for my ISA today
• Down 33%, is there a once-in-a-decade chance to buy this quality FTSE 100 stock?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.

First, the table below shows the companies’ individual valuations based on forecast 12-month price-to-earnings (P/E) ratios and dividend yields.

The average P/E of the group is 13 and the average dividend yield is 5.5%. As you can see from the table below — which puts the current group rating into a historical context of the last four quarters and eight years — the P/E and yield have been within a fairly narrow range since this time last year, apart from a material dip into cheaper territory in my January review.

My rule of thumb for the group is that an average P/E below 10 is bargain territory, 10 to 14 is good value, and above 14 starts to move towards expensive. At 13, we’re in my good value band.

If I were looking to set up an instant starter portfolio today, I’d happily buy these industry heavyweights — with the exception of one. Let me explain the exception, before commenting on the other nine.

Unwise

I’ve been concerned for some time that the market has been overvaluing accountancy software firm Sage. I think there’s been overestimation of the ‘stickiness’ of its customers and ability to attract new ones at premium prices, and underestimation of the keen pricing and allure of the offerings of competitors.

In short, I believe the company has been valued for higher revenue growth, profit margins and return on equity than it’s likely to deliver.

At the time of my last quarterly review, the shares were trading at 802p and the P/E was 25.5. The shares are now 17.5% lower at 662p and the P/E has come down to 20.8. The reason for this is a profit warning in July in which management said revenue growth in the first nine months of its financial year had disappointed, and that profit margins would be at the lower end of its previous guidance.

In my view, fair value for Sage is a sub-20 P/E. It’s getting closer, but isn’t there yet, so I’m content to avoid this stock for the time being.

Nifty nine

With the exception of Vodafone on an elevated P/E of 18.1, all the other stocks are trading on multiples between 8.3 and 14.3. The two trading on 14.3 are stocks in defensive sectors — GlaxoSmithKline and National Grid — which I think merit a somewhat higher P/E than average.

Vodafone’s shares are up 21% since I highlighted the value I reckoned they offered in my last quarterly review. Despite the rise and the now-high-teens P/E, I still see decent value, due to the company’s demerger plans for its towers network and longer-term earnings outlook. As such, I’d be happy to buy it today alongside the other heavyweights, while continuing to hold off on Sage.

The post My top FTSE 100 buys for a starter portfolio in October appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!
• 2 beaten-down stocks I’m tempted to buy for my ISA today
• Down 33%, is there a once-in-a-decade chance to buy this quality FTSE 100 stock?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings, Sage Group, and Tesco. 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.

While partial to a dividend as much as anyone, I think it’s preferable to look for companies with a long history (i.e. around 10 years) of consistently increasing their annual dividends, not those that pay the most. More often than not, the latter end up getting cut anyway. Let’s look at some examples of top-tier companies I think make the grade. 

Three hikers

Accountancy software provider Sage (LSE: SGE) is a consistent dividend hiker, having increased its payout every year for the last 10 years. That, for me, sends a clear message we’re dealing with a strong and stable performer, even if — at 2.5% — the yield won’t get many investors salivating.

Another thing worth mentioning about Sage’s income credentials is the fact its payout ratio — the proportion of dividend its pays out relative to earnings — is still pretty low at a little under 40%. That should mean there’s scope for the company to continue throwing more cash at shareholders in the future. 

The above, when coupled with Sage’s history of generating high returns on capital and big operating margins, lead me to think its current valuation — at almost 24 times earnings — isn’t unreasonable. Quality businesses rarely go on sale at bargain-basement prices. 

Paper provider Mondi (LSE: MNDI) is another firm that’s shown a willingness to lift the proportion of profit it distributes to shareholders. With one exception (2016), it’s increased its dividend every year in the last 10. Right now, it’s forecast to yield a good-but-not-excessive 4.5% in FY2019.  

That’s attractive in my view, especially as payouts look likely to be covered well over twice by profits. Again, to be clear, there’s really no point buying a high-yielding stock if it looks like it’ll ultimately struggle to pay out to shareholders. Mondi’s owners should be just fine for now. 

Like Sage, the £8bn cap achieves good returns on capital and fat margins. Unlike Sage, Mondi’s stock currently changes hands for less than ten times expected full-year earnings after falling just over 25% in value over the last twelve months. Although further dips can’t be ruled out as we approach our Halloween showdown with the EU, that already looks temptingly cheap.

A final FTSE 100 member worth mentioning is Unilever (LSE: ULVR). The owner of brands such as PG Tips, Magnum and Marmite may not generate much excitement among market participants, but the fact remains that — in addition to its defensive qualities — it’s long been a source of rising dividends.

The near-3% yield, adequately covered 1.5 times by profits, looks pretty safe to me and I suspect investors are less likely to ditch the stock in the run-up to Brexit than other stocks in the FTSE 100. Moreover, it’s worth mentioning that had you purchased the shares a decade ago, you’d actually be getting a far higher yield on your original investment, thanks to the 200%+ rise in the company’s share price since then. 

The only drawback to all this is that the predictability of Unilever’s earnings and its geographical diversification means the stock is nearly always expensive to buy. Right now, its price-to-earnings (P/E) ratio is 22 — slightly higher than its five-year average of 21. 

The post Forget the high yielders. I’d buy these 3 FTSE 100 dividend growth stocks instead appeared first on The Twelfth Magpie.

More reading

• 3,566 shares in this FTSE 100 stalwart earns a £1,443 second income
• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!
• 2 beaten-down stocks I’m tempted to buy for my ISA today

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Sage Group. 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.

According to a study that looked at returns between 1900 and 2016, UK stocks that had outpaced the market in the previous year returned an average of 14.1% over the next 12 months.

With this in mind, here’s a selection of stocks from the FTSE 100 that are currently doing very well indeed.

Rapidly rising

Accountancy software provider Sage (LSE: SGE) is a great example of just how profitable taking a contrarian stance can be. Its shares have climbed 50% in value since October, having previously fallen 35% from the beginning of 2018.

Some of this can probably be attributed to the general return in positive sentiment to markets but, as my Foolish colleague Kevin Godbold explained last month, Sage’s recent results have been decent, including a 9.9% increase in recurring revenue.

It’s certainly quite a turnaround for a company whose former CEO departed in 2018 amid disappointing trading and problems relating to the execution of a new business model.

Today Sage looks in much better shape and — at 26 times forecast earnings — boasts a high valuation to match. 

Another stock that has performed admirably for holders lately has been medical technology business Smith & Nephew (LSE: SN). It’s up 36% since last October, comparing favourably to the 6% odd increase seen in the index over the same period. 

May’s trading update has helped keep this momentum going with the £15bn cap reporting a 4.4% rise in underlying revenue over Q1. Management now believes that growth will now be “in the upper half of guidance range of 2.5% to 3.5%” for the full year. 

This news, combined with a series of acquisitions to “strengthen leadership positions across the business,” should give investors confidence that the good times can continue. The shares are available on 22 times forward earnings. 

It won’t come as a surprise that my last example is one the newest additions to the FTSE 100 — sportswear specialist JD Sports Fashion (LSE: JD).

Bucking the trend seen elsewhere on the high street, JD’s revenue jumped almost 50% in the 52 weeks to 2 February with pre-tax profit also rising 15.5% to just under £340m.

Naturally, this form hasn’t been ignored with the shares galloping 70% higher since the beginning of 2019. They now change hands for 18 times expected earnings, compared to the five-year average of 15.

The company’s growth strategy, part of which has involved a spate of acquisitions, including menswear brand Pretty Green and footwear retailer Footasylum (although the latter still needs to be approved by the Competition and Markets Authority) has clearly gone down well with investors. 

Last year’s capture of US firm Finish Line also serves to increase JD’s geographical diversification — a prudent move with Brexit somewhere on the horizon.  

Don’t get too comfortable

Based on recent trading, I think there’s a good chance that all three of these stocks will keep rising, at least in the near term.

There can be no guarantees though. Popular companies can fall hard when their purple patches end and/or external events dictate otherwise. Don’t expect a gong to signal the optimal time to sell. 

If all that doesn’t sit well, then the Fool’s general philosophy of buying quality companies and holding on through thick and thin for many years may have more appeal. 

The post These FTSE 100 stocks have been on a tear. Can the good times continue? appeared first on The Twelfth Magpie.

More reading

• Still stubbornly in pennies, will the JD Sports share price hit £1 again?
• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• Your ISA allowance is waiting! 3 dirt-cheap stocks to consider right now
• How have Sage shares become a dividend machine? 5 reasons why!

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.

Sagging Sage

Investors in Sage endured a torrid 2018. The share price reached highs of over 820p in the first weeks of the year, but by late October had slumped to a low of 525p. However, we’ve since seen a massive rally. This has taken the price back towards 800p (790p, as I’m writing).

When the shares were last at this level, Sage had guided on an acceleration in organic revenue growth to 8% (from 6.6%), moving towards a medium-term target of 10%, while maintaining an organic operating margin of at least 27%.

The acceleration hasn’t materialised, with 6.6% posted in fiscal 2018 and 6.2% in the first half of this year. Meanwhile, the current margin target is 23% to 25%, because the new chief executive has ramped up investment in product and innovation.

Competition

Sage was late to recognise an industry shift towards cloud-based solutions, which are easier to install and update. As such, some cloud-only rivals have superior offerings at lower prices. This makes it hard for Sage to win new customers without reducing its pricing and continuing to invest in product and innovation. Because of this, I think the old targets for revenue growth (10%) and margin (at least 27%) are likely gone for good.

In the circumstances, a rating of 26 times current-year forecast earnings looks far too rich to me, and a prospective dividend yield of 2.2% doesn’t set my pulse racing. I see better value elsewhere in the market.

Rotten core

AstraZeneca’s shares hit a new all-time high earlier this month, and a current price of 6,378p is only a couple of percentage points off the peak. On the face of it, the rating isn’t as high as Sage’s. Its guidance for current-year core earnings per share of $3.50 to $3.70 gives a multiple of 22.5 (at the guidance midpoint and current exchange rates). However, I take issue with the company’s ‘core’ earnings measure.

In recent years, it’s been disposing of older drugs it no longer considers core. However, the one-time-only profits on these non-core asset disposals are included in its ‘core’ earnings numbers. I calculate this has boosted annual core earnings by between 20% and 33%. As such, I put the real forward earnings multiple at upwards of 28 (versus 22.5 on the company’s ‘core’ guidance).

Under pressure

AstraZeneca has maintained an annual dividend of $2.80 (220.5p at current exchange rates) for a good number of years, giving a running yield of 3.5% at today’s share price. However, operating cash flow has barely been enough to cover capital investment over the last five years. Effectively, the company has been borrowing money to pay shareholders.

Two days after paying out the latest dividend ($2.4bn gross), the board announced a placing to raise $3.5bn. Part of the purpose of this was “to improve the company’s overall balance-sheet strength and liquidity.”

As such, the board’s ‘core’ earnings measure masks not only what I consider to be a sky-high real earnings multiple, but also an under-pressure dividend and balance sheet. Like Sage, AstraZeneca does have growth prospects, but again I feel the current valuation is far too rich.

The post 2 FTSE 100 stocks I’d sell in June appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• Down 14% to below £135, here’s where AstraZeneca’s deeply undervalued share price ‘should’ be trading today
• The top 3 FTSE shares for beginner investors to consider buying in 2026
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca and Sage Group. 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.

The shares fell as much as 8.4% in early trading, but moved into positive territory by early afternoon — up 0.7% at 540p, as I’m writing. Nevertheless, they’re 35% below a high of over 820p in January. Is this a great opportunity to buy a stake in the UK’s largest listed technology company?

(Not quite) in line with guidance

At the start of the year, Sage had guided on organic revenue growth of “around 8%.” However, this was reduced to “around 7%” after the aforementioned first-half inconsistent operational execution had produced below-par growth of 6.3%. Q3 saw a pick-up, to 6.8%, but I thought it was a tall order for Sage to deliver 7% growth for the full year, noting that a far more demanding step-up to over 8% was required in Q4.

In today’s results, presented by new chief executive Steve Hare (previously Sage’s finance director), organic revenue growth for the year was given as 6.8%. However, this was only achieved because the company announced today that it is looking to dispose of its Sage Payroll Solutions arm, and is treating it as an asset held for sale. But for this decision, organic revenue growth for the year would have been just 6.6%. Similarly, organic operating margin would have been 27.2%, rather than 27.8%, versus guidance of “around 27.5%.”

Playing catch-up

In addition to my doubts about Sage delivering on its fiscal 2018 guidance, I thought its longer-term targets — annual 10% organic revenue growth and organic operating margins of at least 27% — would very likely have to be lowered. I believe the company has been complacent about the ‘stickiness’ of its customers (leaving it vulnerable to competitors offering lower pricing and superior functionality), and also being slower than its rivals to move to a cloud-based business.

In today’s results, we see that much in the new chief executive’s strategy is about playing catch-up. This includes accelerated investment in innovation, and the capability of Sage Business Cloud. This also includes “focus on the c.£1.5bn of products that are in, or have a pathway to, Sage Business Cloud” and “identifying value creation paths for remaining c.£350m of other products, either under Sage’s ownership, in partnership or through an exit.”

The company said today that, as the business accelerates the pace of transition, the organic revenue growth rate may decrease in the short term. At the same time, it said it expects the required investment will reduce the organic operating margin to between 23% and 25% in fiscal 2019.

Doubts

Sage’s latest underlying earnings of 32.51p a share give a price-to-earnings ratio of 16.6, and its dividend of 16.5p produces a running yield of 3.1%. This valuation is cheap, relative to the company’s historical level.

However, due to what I see as past under-investment in innovation and change, and the inroads made by competitors, I’m doubtful whether Sage’s margin-crushing £60m acceleration investment planned for fiscal 2019 will prove to be a one-off. As such, I’m continuing to avoid the stock for the time being.

The post This FTSE 100 stock is down 35%. Is it now a bargain? appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!
• 2 beaten-down stocks I’m tempted to buy for my ISA today
• Down 33%, is there a once-in-a-decade chance to buy this quality FTSE 100 stock?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.

Of course, there’s always a risk that the stock is cheap for a reason. Today I’m going to look at two of the biggest fallers in the FTSE 100 so far this year. Should you be buying or selling these stocks?

The bad news is out in the open

The share price of software group Micro Focus International (LSE: MCRO) has fallen by nearly 50% so far this year. For shareholders it’s been seriously painful. But is the business really worth so much less than it was eight months ago?

I’m not so sure. The integration of the HP Enterprise software business has been botched and is now a year behind schedule. It seems that the two businesses suffered a clash of cultures and software systems after the merger completed.

These issues have caused high levels of staff turnover, while moving the business onto the HP FAST workflow platform is now expected to cost $960m, compared to a previous forecast of $750m.

In my view, what’s important here is that these problems are out in the open and should be fixable. The group’s last set of results confirmed its previous revenue and profit guidance for the full year. So we should now be able to start looking forward with more confidence.

The numbers aren’t so bad

Micro Focus’s half-year results to 30 April didn’t seem too bad to me. My colleague Kevin Godbold covered the figures here, but in short, Micro Focus confirmed its guidance for revenue to fall by 6%-9% this year. Analysts expect a sales figure of about $3.9bn.

Net debt of $4.3bn remains high, but this should be addressed by a recent $2.5bn deal to sell the firm’s SUSE Linux business.

Analysts’ forecasts suggest that adjusted earnings will be about $1.87 per share this year, supporting a total dividend of $1.02 per share. This leaves the stock on a forecast P/E of 9 with a prospective yield of 6.1%. I believe this could be worth considering as a turnaround buy.

A tough challenge

Accounting software firm The Sage Group (LSE: SGE) slumped after it cut its sales guidance for the year in April. Sage’s share price has now fallen by 30% from January’s post-2000 high of 825p.

Sadly, I fear this decline could have further to go. Persuading the group’s small business customers to switch from desktop software to subscription-based online services is taking longer than expected. And the firm faces tough competition for new customers from online rivals.

These disappointments have led to the recent departure of chief executive Stephen Kelly. His replacement will have to prove that Sage can innovate and adapt to compete online. This could take a while.

Not cheap enough

In the meantime, the stock’s valuation still looks quite high to me. Broker forecasts for 2018 put the shares on a forecast P/E ratio of 18, with a dividend yield of 2.8%. In my view that’s not low enough to reflect the group’s flagging momentum.

I’ll start to get interested if the share price dropped below 500p. For now, I plan to stay on the sidelines.

The post A FTSE 100 dividend stock yielding 6% that’s absurdly cheap right now appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!
• 2 beaten-down stocks I’m tempted to buy for my ISA today
• Down 33%, is there a once-in-a-decade chance to buy this quality FTSE 100 stock?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Micro Focus and Sage Group. 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.

Wise to ditch Sage?

Accounting software giant Sage (LSE: SGE) completed its transition to a subscription-based model last year. And having also launched a comprehensive suite of cloud solutions, it said it was looking forward to accelerating momentum in 2018, and beyond. However in April, it downgraded its organic revenue growth guidance for fiscal 2018 to “around 7%” from a previous “around 8%.”

There have been three items of news over the last month that I view as important:

2 August. A Q3 trading update, showing an acceleration of organic revenue growth to 6.8%, from 6.3% in Q1 and Q2. However, a far more demanding step-up to over 8% in Q4 is required to meet the full-year guidance.

20 August. A research note from Deutsche Bank, with some quite compelling evidence that competitors are gaining share from Sage on lower pricing and superior functionality.

31 August. Directorate change: “The Board and Stephen Kelly, chief executive officer, have come to an agreement and Stephen has stepped down as a director and CEO.”

These things individually would be somewhat of a concern, but the combination of all three has me seriously reconsidering the investment case. In the near-term, I see a risk of a profit warning, because meeting full-year guidance is dependent on “closing a number of Enterprise Management opportunities in September.” More importantly, I believe the company’s longer-term targets of annual 10% organic revenue growth, and organic operating margins of at least 27%, will very likely have to be lowered.

In my view, a current rating of 18 times forecast earnings overvalues a much less bubbly outlook for the business. As such, I rate the stock a ‘sell’.

Shocking year

AIM-listed Internet of Things firm Telit Communications (LSE: TCM) was in the news for all the wrong reasons last year. The company’s profits collapsed. Also, its founder and chief executive Oozi Cats was exposed as Uzi Katz, who had fled fraud charges in the US in his earlier years.

Before all this, I’d warned readers of signs of aggressive accounting at Telit, notably, high and rapidly- increasing capitalised development costs. These flattered earnings, while the company delivered little, if any, free cash flow.

Telit as it is

Finance director Yosi Fait, who stepped into the shoes of the disgraced and departed Cats/Katz, impaired $8.4m of these capitalised development assets last year. Today’s interim results revealed a further impairment of $2.4m. However, at the same time, fresh costs of $13.7m were capitalised.

Despite what I consider a still-high level of capitalisation under Fait, Telit booked a net loss for the period of $11.9m, on 13.7% higher revenue. However, it reckons a stabilisation of gross margins, and cost optimisation, will improve performance going forward. It also expects to complete the sale of its automotive division by the end of 2018, which would strengthen its balance sheet.

Telit remains the subject of a Financial Conduct Authority investigation, as well as being embroiled in tax and civil litigation in Italy. There were no updates on these matters in today’s results. And with the accounts also failing to impress me, I continue to rate the stock a ‘sell’.

The post Is this FTSE 100 stock on the brink of issuing a profit warning? appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!
• 2 beaten-down stocks I’m tempted to buy for my ISA today
• Down 33%, is there a once-in-a-decade chance to buy this quality FTSE 100 stock?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.

Short-term issues

Sage’s shares were trading at over 800p in the first weeks of January but reached a low of under 600p in mid-April. This was because the company lowered its previous guidance of 8% organic revenue growth to 7% for its financial year to 30 September. In its half-year results in May, management said it had identified the root causes of execution issues that had led to the lowered guidance and already made changes. In reporting on the half-year results, my Foolish colleague Paul Summers commented that the issues “have a short-term feel about them.”

The share price has recovered a bit since the April low (and is modestly higher on the back of today’s Q3 update) but at 630p remains well down from the start of the year. The company reported accelerating momentum in Q3, pulling nine-month growth in organic revenue up to 6.5% from 6.3% at the half-year and management reiterated the 7% growth guidance for the full-year.

Attractive business

It looks to me very much as if Sage has overcome temporary issues. The business continues to have highly attractive fundamentals and prospects. Management today restated mid-term guidance that “organic revenue growth will reach 10% on a sustainable basis and organic operating profit margins will be at least 27%.” Long-term, the margin aim is at least 30%.

At the start of the year, Sage was trading on a 12-month forward price-to-earnings (P/E) ratio of 23, with a prospective dividend yield of 2.2%. I’ve always considered the stock a good value buy when the P/E is below 20. Currently, it’s less than 18 and the prospective dividend yield is 2.8%.

More buyable than ever

Shares of Centamin plunged on 25 May when the company released an unscheduled production update. It revised its guidance for 2018 for its Sukari Gold Mine in Egypt, as detailed in the table below.

The reasons for the lowered guidance were that grades were below budget in a low-grade transitional zone in the open pit, while issues of production equipment availability impacted underground grade. I considered these to be temporary setbacks and with the shares having previously traded at over 160p, I considered the stock good value at 129p.

So far, the market hasn’t agreed with me. The shares are now at around 113p and are little moved by today’s half-year report. In this, the company maintained its revised production and cost guidance, and said improvements in open pit grade were already being realised and that improvement in underground grade is set to come through in Q3.

Trading on a current-year forecast P/E of 14.7, falling to 12.2 next year on the back of forecast 20% earnings growth, Centamin also offers a prospective 4.1% dividend yield, rising to 6.1% next year. The shares look more buyable than ever to me at their current level.

The post Why I’d buy this FTSE 100 stock and this FTSE 250 stock today appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!
• 2 beaten-down stocks I’m tempted to buy for my ISA today
• Down 33%, is there a once-in-a-decade chance to buy this quality FTSE 100 stock?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.

With this in mind, here are two shares that may be worth avoiding at present. Neither seems to offer the best opportunity to help you generate high returns so that you can retire before 65.

Positive outlook

Reporting on Tuesday was provider of high technology products and systems for industry and research, Oxford Instruments (LSE: OXIG). The company’s results for the year to 31 March saw it deliver adjusted profit before tax growth of 34.3%, to £42.3m from £31.5m in the previous year. And with its reported order book of £134m, 5% higher than at the same time last year, it seems to be in a strong position to deliver further growth.

The company’s current strategy seems to be performing well. It has invested heavily in research and development, while transitioning to a more commercially-focused operation as it seeks to address a broad range of industrial and academic markets.

Looking ahead, Oxford Instruments is expected to report a 5% rise in earnings for the current year, followed by further growth of 7% next year. While impressive, this rate of growth appears to have been fully factored in by the market, with the stock trading on a price-to-earnings growth (PEG) ratio of 3.6. As such, it seems to be a stock to avoid, despite its improving financial performance.

Uncertain outlook

Also seemingly overpriced at the present time is accounting and payroll software specialist Sage (LSE: SGE). The company’s share price has been volatile in recent months, with it warning in April that sales for the current year would be lower than previous guidance. Its operational execution, as well as a slowdown in its French business, have caused challenges in the recent past, with investor sentiment declining in response.

Still, the stock has a price-to-earnings (P/E) ratio of around 23 at present. This is despite a reduction in its growth outlook, with the stock now expected to report a rise in earnings of 8% in each of the next two financial years.

Clearly, Sage has a solid track record of growth. Its business model, while evolving towards a subscription-based focus, has remained robust in recent years and this has allowed it to generate positive earnings growth in each of the last five years. However, with a high valuation and a narrow margin of safety, it appears to be another company to avoid at the present time.

The post Want to retire before 65? Here are 2 overvalued shares I would avoid appeared first on The Twelfth Magpie.

More reading

• Forget SpaceX shares! I’d rather buy these FTSE 100 growth heroes
• How much should a 45-year-old put in a SIPP each month to try for a million?
• 2 beaten-down FTSE 100 bargains I’m tipping to rebound!
• How have Sage shares become a dividend machine? 5 reasons why!
• 2 beaten-down stocks I’m tempted to buy for my ISA today

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Sage Group. 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.