Shares in software product group Micro Focus (LSE: MCRO) have risen by over 10% today after the company released an upbeat set of first-half results. Clearly, this was an important period since it included the performance of The Attachmate Group which was acquired for $2.5bn just over a year ago.
Top of the class
With revenue having more than trebled and pre-tax profit being 92% higher on a constant currency basis versus the first half of last year, investor sentiment in Micro Focus has been given a major boost. That’s at least partly because the performance is at the top end of management guidance and also because the company is on track to meet its medium-to-long term goals.
In fact, Micro Focus is aiming to deliver returns to shareholders of 15%-20% per annum over the long term, with modest medium term organic revenue growth also set to be achieved. Key to this is a new management structure that will see the current Executive Chairman staying on until at least April 2018. The company’s two divisions, Micro Focus and SUSE, will have two new CEOs from February next year.
Looking ahead to 2016, Micro Focus is expected to post a rise in earnings of 7% and this puts its shares on a relatively appealing price-to-earnings growth (PEG) ratio of 1.9. With dividends being increased by 10%, it remains a strong income stock with impressive cash flow. As such, further dividend rises seem likely and that will make the Micro Focus 2.5% yield hold greater appeal in the coming years.
With an appealing valuation, a rising income outlook and a bright future resulting from past M&A activity, Micro Focus appears to be a sound buy at the present time.
Back with a bang
ARM (LSE: ARM) also seems to be a very appealing purchase for the long term. Its shares were hit hard in the August correction due to the company’s reliance on sales of smartphones across the globe. And with China being a major market for such products, ARM’s shares fell by over 15% during August.
But ARM has staged an impressive recovery since and it now trades within 10% of its all-time high. Despite this, it still offers relatively appealing value for money as its shares trade on a PEG ratio of just 0.6. Certainly, ARM is becoming a more mature company but with double-digit earnings growth forecast for the next two years, it continues to be an excellent long term growth stock.
Long term pick
Meanwhile tech peer Imagination Technologies (LSE: IMG) has endured a very challenging recent past with the company releasing a profit warning in September. It said first-half trading had been disappointing due to a weak semi-conductor market. As such, it expects to make a loss for the period and while second-half trading is expected to be stronger, the company is unsure as to whether it will fully offset its H1 performance.
Clearly, Imagination Technologies is a high quality company that has posted strong earnings growth in previous years. While its outlook is highly uncertain and its shares are likely to be volatile, its PEG ratio of 0.6 indicates that there is a sufficiently wide margin of safety to merit investment for the long term.
