Wall Street’s Best Editor’s Note: Consensus estimates forecast that this little software company will grow its revenues at a 20%+ clip this year, and close to the same for 2017. And while the price has increased, it doesn’t reflect the promise of this company.
U.S. tech stocks have barely beaten the market so far this year, with returns of 6.6% (vs. 6.4% for the Dow Jones Industrial Average), but small-cap techs have performed pretty well, bringing in 10.5% thus far in 2016.
This little software company is up about 20%, yet our contributor, Benj Gallander, of Contra the Heard, thinks it has plenty of room to appreciate even more. And another plus, the stock is currently paying a dividend yield of 2.59%, giving you a double dipper: appreciation plus steady cash flow.
Contributed by Benj Gallander, Contra the Heard
When reviewing the latest quarterly results at software solutions provider Magic Software (MGIC), CEO Guy Bernstein stated, “We are pleased to report another quarter with year-over-year double-digit revenue growth and maintaining our solid 15% operational profitability. Our recent Magic xpa 3.1 release has received tremendously positive customer feedback and we are seeing strong uptake, as well as strong demand for our professional services in areas including cloud and mobility. Our financials remain strong. This quarter, cash flows from operations reached $11.2 million, contributing to our total cash position of $81 million.”
Magic has been around in one form or another since 1983, ancient in technology terms. One of the beauties of being a veteran corporation with revenues and a black bottom line for years is that the likelihood of future success increases. With MGIC, there is certainty going forward. The big question is what the stock price might be.
Just about everything looks good at MGIC, except that stock price. Though it has jumped since February, it cannot gain enough traction to reach double digits. Years ago, the stock was above the $25 mark and being in the technology field, valuations sometimes move to stratospheric levels.
The enterprise has lots of cash in the bank, sitting at $69 million and long term debt just north of $3 million. Net income did decrease by 7% to $4.8 million in the most recent quarter, but in all likelihood it will jump next quarter as revenues continue their ascent. Perhaps those numbers, if they come to pass, will provide the catalyst for the stock price to leap.
Some of this cash hoard will be depleted as MGIC is acquiring 60% of Roshtov Software, the developer of Clicks, for $21 million. Magic is convinced that this company is the leader in patient record information systems for health care providers. An option to acquire the rest of the company is part of the deal.
It is interesting when one checks Yahoo for Magic’s major competitors. CA, Inc. jumps out with a market cap of almost $14 billion. Further up on the ladder is an outfit called Microsoft, with a market cap north of $400 billion. Both are a tad bigger than MGIC’s market cap of $300 million. Looks like MGIC has lots of room to grow.
Why even bother with that comparison? Well, besides a bit of fun, Israeli companies have been scooped up left, right and center over the last number of years. And while we do not expect one of the goliaths to chase this microcap company, perhaps a smaller outfit would find it attractive. Albeit, maybe that is a big “perhaps.”
Magic pays a very healthy dividend of $0.18 per share, a lovely payout in this lowly interest rate environment. With lots of cash in the bank and a healthy bottom line, there is a reasonable possibility that the dividend will either increase, or the company will give a special payout as they have in the past. At our end, we will be happy to sit back and collect it.
Benj Gallander, Contra the Heard Investment Letter, www.contratheheard.com, 416-410-4431
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks