Canadian tech stocks are in a technical bull market. The 22-constituent S&P/TSX Capped Information Technology Index is up 36% so far this year and has performed much better than a larger U.S. tech-heavy NASDAQ 100 Index which has gained 26.7% year to date. However, several Canadian tech stocks have been left behind in 2023. They still trade cheaply given historical valuations, and their future earnings and cash flow-generation potential.
Could now be the right time to buy tech stocks trading cheaply? Yes, this could be the best time to deploy new capital, as bulls push markets higher. High-quality tech stocks trading cheaply could be an investor’s friend.
Cheap tech stocks are usually cheap for good reasons, so not every one of them is a good buy right now. However, selective investors who respect a company’s fundamentals, financial stamina and cash flow stability may wish to take a closer look this beaten-down TSX tech stock.
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Check out Enghouse Systems stock
Canadian enterprise software provider Enghouse Systems (TSX: ENGH) is a cheap tech stock that trades 54% off its 2020 all-time highs. The record highs on ENGH stock were largely driven by a work-from-home trade. Enghouse had a video platform Vidyo that competed with Zoom Video Communications offering to make online meetings possible during the pandemic. Revenue and earnings have largely stabilized above pre-pandemic levels. However, shares in Enghouse Systems haven’t gone anywhere this year, even as other tech stocks generated double-digit gains year to date.
The $2 billion company is a smorgasbord of technology businesses that provide enterprise software to contact centres, video communications, public safety, transit markets, telecoms and healthcare industries, among other niches.
Apparently, a prolonged migration from one time license purchases to software-as-a-service (SaaS) contracts has weighed heavily on Enghouse Systems’s revenue and earnings growth over the past several years. Annual revenue has declined sequentially over two consecutive years 2021 and 2022, and so has operating income. Perhaps this justifies why ENGH stock has been gone down.
That said, the company’s sales run-rate has stabilized above pre-pandemic levels. Enghouse Systems has made strides in incorporating artificial intelligence (AI) in its software products to protect market share. It still generates positive free cash flow, and this has been the life blood it needs to keep its acquisitions-led growth strategy alive.
In February 2023, the company acquired Brazilian SaaS provider Navita, an enterprise mobility software house with a wide market reach. Enghouse bets the acquisition could expand its footprint in the emerging BRICS (Brazil, Russia, India, China, and South Africa) economy.
Growth returning to Enghouse Systems
Acquisitions play a significant role in Enghouse’s growth strategy, and they will remain key growth drivers as long as cash flows remain positive.
Bay Street analysts project a 6% year-over-year growth in Enghouse’s second-quarter 2023 revenue to $113 million. A consensus earnings per share estimate of $0.32 represents flat performance year over year. If revenue and earnings come in line this week, Enghouse’s upcoming earnings instalment would have shown significant improvement from the previous quarter where first-quarter sales dropped by 4.2% and earnings per share dropped by 21%.
Why buy ENGH stock?
Enghouse Systems could be a stable growth passive-income stock of the future in a long-term portfolio. Shares trade at a reasonable forward price-to-earnings multiple under 21. ENGH’s market cap to free cash flow multiple of 16 is lower than pre-pandemic valuation ranges above 16.2 times.
The company is a good-quality TSX tech stock with zero debt on its capital structure. It has no leverage risks associated with rising interest rate environments, and its cash flow-rich operations will help management sustain growth investments, acquisitions, and help pay dividends.
The ENGH stock quarterly dividend yields 2.4% annually. The company raised its dividend by almost 19% for 2023 — its 15th consecutive year of dividend increases by more than 10%.
Although Enghouse Systems stock’s dividend yield is too low for investors to consider it a significant income source right now, the yield on cost will be significant five years from now — if the business retains its stable cash flow portfolios. It most likely will.
