Is this an opportune moment to pick up shares in this FTSE 250 growth share?

Kevin Godbold — Wed, 07 Nov 2018 14:54:23 +0000

I last wrote about cybersecurity solutions provider Sophos Group (LSE: SOPH) in July when the share price had plunged around 20% on the release of the first-quarter trading update. Earnings and business volumes had grown but fallen below expectations. The underlying growth story in the business was good, but the valuation was high, so all the pressure was on the downside.

I concluded that article by saying that even after the share-price fall, the forward price-to-earnings ratio (P/E) was around 50, which meant the shares weren’t cheap when measured against the “green-shoot” earnings the firm was posting. However, I thought there was a “tangible” growth story unfolding and was keen to keep an eye on the stock with “the idea of picking up a few shares at opportune moments.” Fast-forward and essentially, the share price moved sideways before plunging more than 25% today on the release of the half-year report. Let’s check back in to see what the company said.

Promising figures

At first glance, the figures look promising. Revenue grew almost 18% compared to the equivalent period the year before and profit before tax came in at $26m compared to a loss of $35.5m the year before. At constant currency rates, first-half billings rose 2%, and there was a “modest improvement” in operating cash flow and free cash flow against the comparative period. Last year, the firm did exceptionally well, so the directors described the comparator period as “tough.”

Chief executive Kris Hagerman explained in the report that Sophos is making “solid progress” with its strategy of delivering “advanced and highly effective” cybersecurity solutions to IT professionals at organisations of all sizes. The firm saw ongoing growth in Sophos Central, its strategic cloud management platform, which now has over 77,000 customers. The firm is also “well on track” to release two significant upgrades to its flagship products, Intercept X with EDR, and XG Firewall v17.5, which aim to deliver synchronised security. The move should position Sophos well “in the market for next-generation security solutions, for H2 and beyond.”

Well placed for future growth

The outlook is positive. Sophos thinks it is “well positioned” for future growth. There is a “strong” innovation pipeline and the firm is making a “significant” investment in its strategic Sophos Central cloud platform. There should be a “modest” improvement in constant currency billings growth in the second half of the year compared to the first half. But the company reckons it is on course to deliver a “significant improvement” in the rate of overall constant currency year-on-year billings growth during 2020.

City analysts following the company have pencilled in earnings growth of around 14% for 2020. At today’s share price close to 339p, the forward P/E rating sits at 40 or so, which is an improvement on the rating of 50 back in July. However, I think speculation drove the shares too high before this firm was profitable. I believe there is a robust-looking growth story emerging in the underlying business and soon the valuation looks set to collide with the growth curve to form an attractive entry point – but I don’t think we are quite there yet, so I’ll watch from the sidelines a bit longer

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Kevin Godbold 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.

Should I pile into Sophos Group plc, down 20% today?

Kevin Godbold — Thu, 05 Jul 2018 11:20:49 +0000

Today’s first-quarter trading update from cybersecurity solutions provider Sophos Group (LSE: SOPH) has sent the stock plummeting and it’s down around 20% as I write. Is this a good opportunity to pick up a few of the shares on the cheap?

The FTSE 250 company says its products help secure the networks used by around 100m people across 150 countries and 100,000 businesses including well-known names such as Pixar, Under Armour, Northrop Gumman, Xerox, Ford, Avis and Toshiba. The operation is large and heading towards what looks like sustainable annual profits. The company’s strategy involves keeping IT security simple and reliable as networks grow in complexity, which involves managing networks, servers and devices through the cloud.

Good, but not as good as expected

The full first-quarter trading update – covering the months of April, May and June – is scheduled for release on 26 July. But in today’s update the firm said it expects to report growth in billings for the first quarter of the year up 6% compared to the equivalent period last year and up 2% at constant currency rates. The directors said there was a strong performance in revenue and cash flow driven by a “strong demand environment.”

That all sounds good but Q1 billings are lower than previously expected, so the company is actually reporting a ‘miss’ on anticipated business volumes, which could explain the share-price tumble. The firm points to its Enduser security business as being responsible for the shortfall because it “faced a particularly challenging comparable.”

A miss on expectations it might have been, but underlying Enduser billings growth in the first quarter of 2018 was up 50% at constant currency rates after adjusting for a material contract that affected the figures in 2017, which is impressive and a good indicator that the growth story here remains on track. The directors reckon that high-profile global ransomware attacks, such as that by WannaCry, drove “the significant increase in demand for our Endpoint protection solutions.” The firm’s new next-generation endpoint solution, Intercept X, made a maiden contribution to the billing mix in the first quarter, which also helped the outcome.

Earnings set to rise

Looking forward, the company expects the same factors to influence the second quarter of the year, which will be measured against an “easier” prior-year comparable. Then, “as the prior-year comparators normalise,” the firm is anticipating ongoing constant currency billings growth measurable in mid-teen percentages in the second half of the year. Meanwhile, City analysts following the firm expect earnings to decline 6% for the trading year to March 2019 before shooting up around 44% the year after that.

Even after today’s share-price fall, the forward price-to-earnings ratio sits around 50, so the shares aren’t cheap when measured against these green-shoot earnings. But there’s a tangible growth story unfolding, which makes me keen to keep an eye on the stock with the idea of picking up a few shares at opportune moments.

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