Enghouse Stock: A Diamond in the Rough Tech Market

A diamond in the rough tech market is a “strong buy” for its impressive fiscal 2022 earnings and 14 consecutive years of dividend increases.

| More on:
Overhead shot of young adults using technology at a table

Image source: Getty Images

For the first time since 2019, Canada’s technology sector will not shine bright this year. With only one week of trading left, a decent finish in 2022 is remote. As of this writing, tech stocks are down 35.84% year to date against the 60.2%, 80.3%, and 18.3% gains in 2019, 2020, and 2021.

If you’re looking for a great year-end buy, only Enghouse Systems (TSX:ENGH) is the diamond in the rough tech market. The stock also underperforms year to date (-24.54%), but the chances of recovery next year are high following the impressive financial results in the fourth quarter (Q4) and full-year fiscal 2022.

Winning in turbulent markets

Enghouse Systems is an enterprise software solutions provider whose earnings-growth strategy focuses on internal growth and acquisitions. This $1.97 billion company caters to contact centres, video communications, virtual healthcare, and telecommunications networks, and it also has clients in public safety and the transit market.

Management said it faced turbulent global markets in fiscal 2022, aggravated by rising interest rates, high inflation, and aggressive competition from vendors in the Software-as-a-Service (SaaS) sector. Nevertheless, Enghouse endured the challenges, as evidenced by the financial and operational results.

In the three and 12 months that ended October 31, 2022, revenue declined 4.5% and 8.5%, respectively, to $108.1 million and $427.6 million versus Q4 and full-year fiscal 2021. However, Enghouse has more than made up in the bottom lines. The net income in the same periods rose 22.4% and 1.8% year over year to $36.9 million and $94.5 million, respectively.

Enghouse had a $129.7 million in positive operating income and $145.1 million in cash flows from operating activities. Management said the results demonstrate the company’s ability to generate positive operating cash flows, even during adverse economic conditions. It also augments cash reserves for acquisitions and further investments.

Competitive advantages

For fiscal 2022, investments in research and development (R&D) for ongoing product improvements and innovation reached $72.3 million. Enghouse’s acquisition pipeline expansion and active pursuit of acquisition opportunities are likewise ongoing.

Recently acquired Competella, NTW, and VoicePort broadened the geographic reach and product portfolio. Enghouse’s immediate concern is to continue expanding the availability of SaaS offerings globally. The demand primarily for customer experience and contact centre technologies is rapidly growing.

Meanwhile, offering customers and partners choice with various deployment options, whether private cloud, multi-tenanted cloud, or on-premise solutions, has been highly successful. It differentiates Enghouse in the vertically focused enterprise software markets while addressing varying customer needs.

Rare find

Canadian tech stocks saved the TSX from disaster in 2020. Canada’s primary stock market managed to post a 2.2% overall gain, because of the robust performance of the tech sector, led by Shopify. Unfortunately, high inflation and soaring interest rates in 2022 triggered a severe selloff in the growth-oriented market.

However, if you anticipate a tech rebound in 2023, Enghouse Systems Limited is the top choice right now. Besides the impressive revenue and income growths in fiscal 2022, it’s also a Dividend Aristocrat — a rarity in the tech sector. The dividend-growth streak is 14 consecutive years, while the current dividend offer is a decent 2.14%.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Enghouse Systems and Shopify. The Motley Fool has a disclosure policy.

More on Tech Stocks

A shopper makes purchases from an online store.
Tech Stocks

Better Buy: Shopify Stock or Amazon?

Let's see which e-commerce stock is a better buy between Shopify and Amazon in 2023 and beyond.

Read more »

Businessman looking at a red arrow crashing through the floor
Tech Stocks

3 Growth Stocks Down Over 50% That Are Screaming Buys in January 2023

Given their healthy growth prospects and discounted stock prices, these three growth stocks could deliver superior returns over the next…

Read more »

New virtual money concept, Gold Bitcoins
Tech Stocks

These 2 Stocks Carry a Lot of Risk, But Their Upside is Huge

If you want windfall gains, you have to risk losing what you invest. These two stocks with disruptive technology could…

Read more »

Money growing in soil , Business success concept.
Tech Stocks

3 Growth Stocks Down More Than 50% to Buy for Outsized Gains in 2023

Beaten-down growth stocks such as Shopify provide investors the opportunity to derive exponential gains once market sentiment improves.

Read more »

Businessman holding AI cloud
Tech Stocks

ChatGPT Could Spell an “AI Revolution” for These Canadian Stocks

ChatGPT indicates a breakthrough in AI that could bolster stocks like Shopify (TSX:SHOP).

Read more »

Tech Stocks

Your Future Self Will Thank You for Buying Lightspeed Stock in 2023

Here’s why you may want to add LSPD stock to your portfolio in 2023 to hold it for the long…

Read more »

a person watches a downward arrow crash through the floor
Tech Stocks

Don’t Wait for a Market Crash: These 2 Top Stocks Are on Sale

Waiting for a market crash can take away the opportunity to buy early in the market rally while growth stocks…

Read more »

Coworkers standing near a wall
Tech Stocks

What’s Next for Magnet Forensics Stock After Hitting a 52-Week High Last Week?

While TSX tech stocks have lost around 30% last year, Magnet Forensics stock has soared 82%.

Read more »