Earlier this week we looked at a Canadian tech stock that is making big strides in business telephone systems: See Growth stocks: Rising to the cloud gives Mitel Networks bright prospects. Today, we profile another tech stock that gets much of its revenue from the telephone business. Responding to a question from a Member of his Inner Circle, Pat McKeough looks at Enghouse Systems, which sells software to call centres and also provides engineering programs to a variety of companies. Pat assesses the risk of the company’s policy of rapid growth by acquisition and its highly competitive market and concludes that this stock does not match Mitel as a growth stock.
Q: Pat: What is your view of Enghouse Systems? Regards.
A: Enghouse Systems, (symbol ESL on Toronto; www.enghouse.com) operates through two divisions.
Interaction Management (which supplies 70% of total revenue) sells software for managing call centres. The Asset-Management business (30% of revenue) provides engineering programs used by utilities, computer and telecommunications companies around the world.
In the three months ended April 30, 2015, Enghouse’s revenue rose 25.0%, to $68.7 million from $55.0 million a year earlier, largely due to contributions from acquisitions.
Earnings gained 15.4%, to $7.6 million, or $0.29 a share, from $6.6 million, or $0.25. The company’s balance sheet is sound: it holds cash of $88.5 million, or $3.36 a share, and has no debt.
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Enghouse has made 7 acquisitions in past two years, and plans to make more
Here’s a closer look at Enghouse’s recent acquisitions:
In May 2015, the company bought Reitek SpA, a provider of call-centre software and systems, for $6.2 million. This purchase expands Enghouse’s presence in Italy.
In March 2015, it bought Denmark’s CDRator A/S for $23.0 million. This business, which had $20.0 million of revenue in 2014, provides software that automates billing and customer-care functions for mobile network operators.
In 2014, Enghouse made five acquisitions, including companies in Germany, Belgium, Sweden and Ireland.
The stock trades at a high 48 times this year’s forecast earnings of $1.08 a share. Enghouse raised its quarterly dividend by 20.0%, to $0.12 from $0.10, with the May 2015 payment. The shares yield 0.9%.
The company plans to keep growing by acquisition, especially in Europe. That lets it broaden its customer base and geographic reach, but it does add risk. The company also operates in highly competitive markets.
We don’t recommend Enghouse Systems’ thinly traded shares.
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