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LONDON -- Sage Group (LSE: SGE.L ) reported "variable trading performance" from its important European division in the third quarter of its fiscal year. For those not familiar with managerial-speak, that means thing were mostly tough with some bright spots.
The bit that has the market's attention -- and sent shares down 3% to start the day -- is management's statement that the European growth it was anticipating in the second half hasn't shown itself yet. Unfortunately, as Europe shows few signs of strength as we move through summer, it seems unlikely this will change anytime soon.
Europe currently makes up nearly 60% of the FTSE 100 (INDEX: ^FTSE ) company's revenue, so struggles in this market are likely to drag on overall performance. To counter its reliance on the Continent, Sage recently paid a steep price to build out its presence in Brazil with the acquisition of a 75% stake in Folhamatic for 4.5 times sales and 13.4 times EBITDA. While this could be a good long-term move, a price that high is only justified by significant growth, and that may be a while coming as it appears Brazil is headed for a slowdown of its own.
Pricey or not, it is acquisitions of this type that have largely separated Sage and fellow London-listed engineering software company Aveva (LSE: AVV.L ) from many in the IT sector in the eyes of some market analysts. Fears of further weakening in Europe and stalling growth in the U.S. and emerging markets have many expecting 2012 will be a bad year for companies that provide businesses with the software and hardware to run -- and more important, grow -- their operations, but opportunities to buy growth in new markets could help Sage sidestep the economic cycle.
According to data from S&P Capital IQ, the IT sector has been the worst-performing sector over the past three months, down over 7% while the FTSE All-Share was essentially flat. While near-term economic pain may hurt earnings this year, many IT firms -- especially those focused on software -- have the cash flow to see them through this rough patch, and the push by companies to cut costs through automation and efficiency should provide strong growth for years to come.
While Sage's price-to-earnings ratio of 14.6 may not appear cheap, it is slightly below the average for the maligned IT sector. Opportunistic investors may want to look at Sage -- and others in the sector -- as a way to capitalize on the market's near-sightedness.
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