Picture supply: The Motley Idiot
In his 1996 letter to shareholders of Berkshire Hathaway, Warren Buffett gave the next recommendation to budding traders: “You don’t must be an skilled on each firm, and even many. You solely have to have the ability to consider firms inside your circle of competence.“
Sounds acquainted
As an accountant, The Sage Group (LSE:SGE) is an organization I do know effectively. Through the years, I’ve used lots of its merchandise and many others do too. The group claims that over 6m prospects use its monetary, HR and payroll software program.
The beauty of pc software program is that you just solely must make it as soon as however can promote it a number of occasions. Regardless of what number of copies you promote, the price of manufacturing stays the identical. This implies it’s attainable to earn big margins.
Throughout the 12 months ended 30 September 2024 (FY24), Sage reported a gross margin of 92.8%, just about the identical as for the earlier 12 months. Additionally, as a result of customers like familiarity, they’re reluctant to vary software program suppliers. In FY24, the group reported that 97% of its income was recurring.
Through the years, Sage has considerably grown its buyer base regardless of the emergence of many alternate options like Xero, QuickBooks and Zoho. And though the US is its greatest market, it’s unlikely to be affected by President Trump’s tariffs.
However in frequent with many development shares, the dividend on provide is kind of poor. Based mostly on its FY24 payout, the yield’s presently (2 June) 1.7%.
Having mentioned that, it’s equal to 54% of underlying fundamental earnings per share (EPS), which is a fairly beneficiant payout ratio for any firm.
This obvious contradiction tells me that the inventory’s price-to-earnings (P/E) ratio have to be on the excessive aspect. Certainly, it trades on 32 occasions FY24 earnings. A excessive a number of is typical of a software program evaluate however this isn’t far off the present common for the ‘Magnificent 7’. But I can’t see Sage rising like these titans.
Or can it?
Current historical past
From 2019-2024, the common annual development charge in earnings was 6.33%. Nonetheless, this consists of two years – 2020 and 2021 (we may name these ‘the Covid Years’) – when the group’s revenue fell.
Exclude these, and the speed of enlargement will increase to 16.79%. That’s way more spectacular. And it’s just about the identical as analysts expect the Magnificent 7’s earnings to develop in 2025.
| Monetary 12 months (30 September) | Underlying earnings per share (pence) | Change (%) |
|---|---|---|
| 2024 | 37.9 | +22.6 |
| 2023 | 30.9 | +17.0 |
| 2022 | 26.4 | +10.9 |
| 2021 | 23.8 | -10.9 |
| 2020 | 26.7 | -4.3 |
| 2019 | 27.9 | -15.2 |
Though he acknowledges that only a few firms will obtain this, the opposite piece of recommendation given in Warren Buffett’s 1996 letter was to solely purchase shares in firms “whose earnings are just about sure to be materially larger 5, ten and twenty years from now”.
The most recent analysts’ forecasts are predicting Sage’s earnings to develop for not less than the following three years. The consensus prediction for EPS is 42.8p (FY25), 48.8p (FY26) and 55.1p (FY27).
If these are achieved, the common annual development charge from 2022-2027 can be 15%.
Nonetheless, the group faces some challenges. Its buyer base is predominantly small and medium-sized companies. These are most susceptible to an financial downturn. And with the transfer to cloud-based purposes, it might be badly affected by a cyberattack.
Regardless of these attainable dangers, I believe Sage is an organization that long-term development traders may contemplate including to their portfolios.
