Enghouse Systems’ stock is set to go sideways, this fund manager says

Growth by acquisition story Enghouse Systems (Enghouse Systems Stock Quote, Chart TSX:ENGH) has been a strong performer over the past decade but has traded choppily over the past 12 months.

But what’s in store for the stock going forward? Probably more sideways movement, says portfolio manager John Kim of Aventine Asset Management, who says ENGH’s share price is already high.

Enghouse had an up-and-down year in 2018 where it rose over 40 per cent from $30 to the $42 range over the first half of the year before sliding back to where it started by the year’s end. And so far, 2019 has been a bit of an improvement, with the stock currently sitting up almost ten per cent year-to-date.

Founded back in 1984, Enghouse is known for its acquisition capabilities, which have been on display in recent months. In February, Enghouse bought Swedish telecom company ProOpti, in March, it acquired video services software company Espial Group, whose share price had been suffering over the past year, and then in May, Enghouse bought New Jersey-based video software company Vidyo Inc for $60 million.

The deal-making is par for the course for Enghouse and can lead to activity in the company’s share price, says Kim, but don’t expect the stock to keep popping, as ENGH’s CEO is notoriously selective in his purchases.

“I have the greatest of respect for Steve Sadler who is the CEO. He’s a very astute buyer of technology companies that he rolls in, kind of like [Constellation Software] but he’s much more value-focused,” said Kim, in conversation with BNN Bloomberg on Friday.

“Fairly high” valuation on Enghouse Systems’ stock, Kim says

“But I think that the valuation is fairly high on Enghouse. If you look at the last 20-30 years, for a long time the stock didn’t really move because, I guess, Steve found it hard to buy anything. And then recently he has bought a bit more and so the stock has obviously reflected that in the last few years,” he says.

“It could get to the point again that he just doesn’t find anything to buy and if that happens, I think that the stock will either just meander sideways and the multiple may start to shrink again,” Kim says.

Enghouse’s share price jumped on its latest quarterly report which came on June 6. The company saw its revenue increase 4.7 per cent year-over-year from $85.2 million to $89.2 million on the back of recent acquisitions and incremental licensing revenue. Adjusted EBITDA rose from $25.4 million to $27.2 million with net income registering $0.30 per share compared to $0.28 per share a year prior. Analyst had expected revenue of $88.4 million and earnings of $0.28 per share. Enghouse has delivered a stable dividend over the years, as well, which currently sits at 1.2 per cent yield.

“Sadler is a good operator and is very, very value-focused,” says Kim. “Unless he continues to do more acquisitions I think that the stock is just going to go sideways, so you have to believe in that part of it but he has shown that he can go for many years without doing anything.”