Computer security specialist Sophos (LSE: SOPH) has been a success story for growth investors with a 79% share price rise since flotation in July 2015 with the bulk of that coming in the last couple ofmonths.
Full-year results released on Wednesday show what the excitement is all about, with better-than-expected figures pushing the share price up more than 10% in morning trading. Billings during the year (that is, invoiced sales but not revenue) rose by 18.2%, despite the Brexit-led fall in the pound.
The company reported an adjusted operating profit of $38.3m, which was lower than the previous year but still ahead of expectations, and it saw free cash flow almost trebling to $133.4m. But this years figures arent really what its about after all, adjusted earnings per share of 8.5 cents (approx 6.6p) puts the shares on a P/E of 62.
Sparkling expectations
No, its the future that people are investing for, with Sophos reckoning itcan reach annual billings of around $1bn by the year 2020, withoperating profit of more than $100m.On that basis,we could see a P/E multiple of around 20 or lower, which would be a lot less scary.
But Im just a little cautious at the moment as I cant help feeling Im seeing a bandwagon effect on the share price from last weeks massive cyber-attack that hit the NHS. Computer security spending is expected to rise as a result, and Sophos does supply security systems to the NHS but I can see investors drifting away as the panic subsides.
Overall, Im seeing a good company with a great future here, but with perhaps something of a short-term overvaluation. Id consider buying on any future dips.
Revamped growth
B2Beventsorganiser UBM (LSE: UBM) is a very different proposition. The company largely reshaped itself in 2016, disposing of itsPR Newswire business for490m (of which243.7m was paid out as a special dividend), and acquiringAllworld Exhibitions for392.9m.
That made comparisons with previous years tricky, but UBM did record a 19.2% rise in adjusted operating profit from continuing operations, with diluted earnings per share (again from continuing operations) up 31%. Free cash flow looked strong with an impressive cash conversion rate of 96%.
Forecasts for 2017 currently suggest a further 26% rise in EPS, putting the 707p shares on a forward P/E of 14. With that level of expected growth, I see that as an attractive valuation, especially with dividends of around 3.2% on the cards.
Good start to 2017
Wednesdays trading update assured us that things are going well, with afull-year outlook thats unchanged. The company did admit that its spring fashion events had been mixed, but stressed that its focus remains on accelerating organic growth and driving further margin improvement.
But I do pause for thought a little when I see the modest 2% EPS rise pencilled-in for 2018, and I think a year of no real growth like that could knock the share price back. Im in this investing lark for the long term, but the markets are fickle and rarely see beyond the end of the current year.
The integration ofAllworld is apparently going well, and I really do think were seeing a good long-term growth prospect here. But Im wary of sentiment, and its another that I might consider buyingon the dips.
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