It has been a good start to the stock markets today. The FTSE 100 index is once again above the 7,000 level in lunchtime trading. But it is a particularly good day for one FTSE 100 stock.
Accounting software provider Sage Group (LSE: SGE) is the biggest index gainer so far, with a 3% increase in share price. This follows the release of its results for the six months ending March 31.
The numbers themselves were mixed. But investors are clearly focused on the positive aspects. Let me explain.
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Sage Group has a positive outlook
A look at statutory measures showed weakness in both revenue and profits. While revenues were down by 4% from the corresponding six months of last year, operating profits were down by a whole 30%.
Statutory measures are required for reporting to government authorities, and allow for a comparison across companies based on the same accounting principles. But companies often release two sets of financials. The second one offers alternative performance measures, which are meant to convey how the company really sees its performance.
On these measures, Sage Group performed relatively better. While its organic total revenue was up 1%, its organic recurring revenue was up by 4%. The organic operating profit was still down, but at 12% lower than in the first half of last year, this was a far smaller decline than that for the statutory measure.
I think the really encouraging bit of the release was its outlook. First, based on its latest performance, the company now expects full-year recurring revenue “to be towards the top end of our guidance range of 3% to 5%”. Second, beyond the current financial year, it expects “margins to trend upwards over time”. It seems particularly positive on investments in its cloud services for business.
Supportive environment
Looking beyond its latest financial update, there is much to like about Sage Group. It is a financially healthy company in a sector with relatively stable demand.
Besides this, as the economy gets back on track, its software should be in greater demand. This is specifically likely for Sage Group that caters to start-ups, and small and medium-sized businesses. These have been hit hard by lockdowns, but may well be poised to thrive as the economy powers ahead.
Underwhelming share price trend
I think this bodes well for the company, but its longer-term share price trend is underwhelming. While its growth this year may be robust (and the years ahead may be too), as an investor I benefit only if its share price also increases over time.
Still, I think for now there is plenty of scope for an increase. Not only is the share price way below pre-pandemic levels, its price-to-earnings (P/E) ratio at 23 times makes the group share much less pricey than many other FTSE 100 stocks. Also, it pays a dividend.
I will give the share closer consideration.
