Until today, it had been a relatively positive year for investors in Iomart (LSE: IOM), with shares in the cloud computing specialist gaining as much as 10% since the start of the year. However, todays 16% fall follows a week that has seen the companys share price drop from 280p to the current level of 229p. Heres why it has fallen so much and what the future could hold for Iomart.
Iomart has been the subject of three bids from private equity firm Cinven, with the first two bids being rejected by Iomart and the third leading to no deal despite being backed by Iomarts senior management team. Cinven has now indicated that it will not be making any further offers and, as such, the bid premium that had been included in Iomarts share price has now disappeared.
Clearly, this is disappointing news in the short term for investors in Iomart. However, the long-term potential of the business remains relatively strong. Indeed, Iomart is not a company that needs to be taken over: it has delivered strong bottom line growth in recent years and is forecast to continue to do so in future.
For example, Iomart is expected to increase earnings per share (EPS) by 21% in the current year and by 14% next year. Certainly, these growth rates are behind the levels seen in previous years, where the company has grown earnings by an average of 84% per annum during the last four years. However, it shows that there is potential for the business, with secure cloud storage solutions being a highly lucrative space right now.
On the face of it, Iomart continues to look overvalued even after its considerable share price fall. Thats because it currently trades on a price to earnings (P/E) ratio of 17.3, which may at first glance appear rather high. However, when the companys earnings growth potential is taken into account, it equates to a price to growth (PEG) ratio of just 1, which indicates growth is on offer at a reasonable price. Furthermore, with dividends per share due to increase by 18% this year and by 15% next year, Iomart could have income potential, too.
Although todays share price fall may be disappointing in the short run, it would be of little surprise if another bidder came along over the medium term. After all, with strong growth prospects, a reasonable price and an enviable business line, Iomart looks like a good buy right now.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.