Is Now the Time to Buy Sage Group?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Sage  (LSE: SGE  ) to determine whether you should consider buying the shares at 336 pence.

I am assessing each company on several ratios:

Price/Earnings, or P/E: Does the share look good value when compared against its competitors?

Price/Earnings to Growth, or PEG: Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Price

3-Year EPS growth

Projected P/E

PEG

Yield

3-Year Dividend Growth

Dividend Cover

336 pence

3%

15.3

1.4

3%

35%

1.9

The consensus analyst estimate for next year's earnings per share is 22 pence (11% growth) and dividend per share is 11.2 pence (12% growth).

Trading on a projected P/E of 15.3, Sage appears to be much cheaper than its peers in the software and computer services sector, which are currently trading on an average P/E of around 21.3.

Sage's P/E and double-digit growth rate give a PEG ratio of around 1.4, which implies the share is slightly overpriced for the near-term earnings growth the firm is expected to produce.

Sage supports a 3% dividend yield, which is 50% higher than the software and computer services sector average of around 2%. In addition, Sage has a three-year compounded dividend growth rate of 35%, implying the yield will continue to stay above that of the company's peers.

Indeed, the dividend is just under two times covered by earnings, giving Sage plenty room for further payout growth.

So, is now the time to buy Sage?
Sage is a world-leading software company that develops and distributes software to assist small- and medium-sized businesses in everyday business management activities. In addition, the company offers software training and support to its new and existing customers.

Obviously, as Sage sells business management software, the company is exposed to the fragile economic environment. That said, I believe Sage has managed to avoid most of the downturn over the past five years.

You see, Sage sells the majority of its software products on a subscription basis, where customers buy Sage's software for a year and pay through monthly installments, which also cover additional training and support.

These monthly installments give Sage predictable recurring revenues and a strong cash flow. Indeed, due to these recurring revenues, Sage's pre-tax profit has grown every year since 2002. Furthermore, over the last ten years, the company's pre-tax profit has grown an aggregate 160%.

Currently, Sage has relatively few competitors in the market for business management software. However, this market has relatively low barriers to entry and Sage's recurring revenues are starting to attract competitors. In particular, software behemoth Microsoft has started to take an interest in the market, which could pose a threat to Sage's long-term prospects.

Nonetheless, Sage remains a world-leading software company for business management and the company is currently training at a discount to its peers, So, all in all, I feel now looks to be a good time to buy Sage Group at 336 pence.

More FTSE opportunities
As well as Sage, I am also positive on the FTSE 100 share highlighted within this exclusive free report.

You see, the blue chip in question offers a 5.7% income, its shares might be worth 850pence  compared to about 700 pence now -- and it has just been declared "The Motley Fool's Top Income Stock For 2013"!

Just click here to read the report -- it's free.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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  • Report this Comment On April 02, 2013, at 3:17 PM, reddbaron wrote:

    This is the most amazingly wrong on facts article I have ever read. Period.

    1. You see, Sage sells the majority of its software products on a subscription basis,

    >>> This must be news to Sage? No Sage sells mostly on-premise software for a license fee and yearly M&S. They are only now trying to move (slowly) to the subscription model.

    2. Currently, Sage has relatively few competitors in the market for business management software.

    >>> Lucky for them! Again dead wrong. Their market is a crowded one and their portfolio of products is aging.

    3. However, this market has relatively low barriers to entry

    >>> Darn! Wrong again. The barriers are high because the software products the company sells are complex. However there are many players in the market who have made it hard on Sage to compete.

    4. and Sage's recurring revenues are starting to attract competitors.

    >>> What??? What does that mean?

    5. In particular, software behemoth Microsoft has started to take an interest in the market,

    >>> Watch out now, Sage! Really now, so Microsoft has not been in this business, say for 25+ year?

    6. which could pose a threat to Sage's long-term prospects.

    >>> Indeed.

    I suggest readers read a more relevant article here http://www.proactiveinvestors.co.uk/columns/broker-spotlight...

    Bank of America Merrill Lynch has downgraded Sage (LON:SGE) after the accountancy software giant’s recent good run on the back of a share buyback programme.

    Welcome though the share buyback initiative may be, Merrill Lynch worries that Sage cannot keep up the pace of buybacks without affecting the stock’s liquidity.

    The broker thinks the key driver for the stock henceforth will be the company’s ability to execute on its strategy to build a robust Cloud product portfolio.

    “Although the move to the Cloud is the right strategy, we believe, this is [a] slow process and [we] do not anticipate imminent positive catalysts,” the scribblers at Merrill Lynch warn.

    “Historically very few on-premise companies have successfully transformed themselves into Cloud players. In this context the market will remain cautious on the success of this transformation at Sage until the company demonstrates a few quarters of consistent performance with its new Cloud product launches,” the broker reckons.

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