Is Enghouse Systems Limited the Top Software Stock to Own Today?

Enghouse Systems Limited (TSX:ESL) released fourth-quarter earnings on December 18 and its stock has reacted by falling slightly. Should you be a buyer on this weakness?

The Motley Fool

Enghouse Systems Limited (TSX: ESL), one of the world’s leading developers of enterprise software solutions, released fourth-quarter earnings after the market closed on December 18 and its stock has responded by making a slight move to the downside. Let’s take a closer look at the quarterly report to determine if we should use this weakness as a long-term buying opportunity or if we should avoid an investment for the time being.

The better-than-expected Q4 results

Here’s a summary of Enghouse’s fourth-quarter earnings compared to what analysts had expected and its results in the same period a year ago.

Metric Reported Expected Year-Ago
Earnings Per Share $0.36 $0.33 $0.36
Revenue $62.06 million $61.71 million $47.17 million

Source: Financial Times

Enghouse’s earnings per share remained unchanged and its revenue increased 31.6% compared to the fourth quarter of fiscal 2013. These results were driven by the completion of five acquisitions during the fiscal year and sales increasing 32.8% to $32.22 million in its Hosted & Maintenance Services segment, 27.4% to $19.12 million in its Software Licenses segment, 39.5% to $8.86 million in its Professional Services segment, and 19.9% to $1.86 million in its Hardware segment.

Here’s a quick rundown of eight other important statistics and updates from the report:

  1. Net income increased 0.3% to $9.74 million.
  2. Gross profit increased 28% to $42.88 million.
  3. The gross margin contracted 90 basis points to 69.1%.
  4. Adjusted EBITDA increased 25.8% to $15.6 million.
  5. The adjusted EBITDA margin contracted 120 basis points to 25.1%.
  6. Operating profit increased 21.7% to $14.59 million.
  7. The operating margin contracted 190 basis points to 23.5%.
  8. Ended the quarter with $84.9 million in cash, cash equivalents, and short-term investments.

Should you buy shares of Enghouse Systems today?

Enghouse Systems is a leading provider of enterprise software solutions, and increased demand for its products and services led it to a very strong fourth-quarter performance. The company reported year-over-year growth of more than 20% in revenue, gross profit, EBITDA, and operating profit, while also surpassing analysts’ earnings per share and revenue expectations, but its stock has responded by declining slightly.

I think the weakness in Enghouse’s stock represents an intriguing long-term opportunity, because after this decline, it trades at 28 times fiscal 2015’s estimated earnings per share of $1.42 and just 22.5 times fiscal 2016’s estimated earnings per share of $1.77, both of which are inexpensive given the company’s growth rate. In addition, the company currently pays an annual dividend of $0.40 per share, which gives it a respectable 1% yield at current levels.

With all of this information in mind, I think Enghouse Systems represents one of the best long-term investment opportunities in the software industry today, so investors should take a closer look and consider initiating positions in the days ahead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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