Is there more upside to Enghouse Systems (Enghouse Systems Stock Quote, Chart, News TSX:ENGH)?
The Canadian enterprise software company was in the right place at the right time when it came to the COVID-19 pandemic, with its software solutions helping businesses to keep functioning on a remote-work basis.
And while the company has seen tremendous growth, so has ENGH’s share price, leaving investors understandable on the fence, according to David Driscoll, president and CEO of Liberty International Investment Management, who says the stock may have gotten too hot.
“Enghouse has been going gangbusters because of their video technology since COVID-19 stock has taken off,” says Driscoll, in conversation with BNN Bloomberg on Tuesday.
“As far as the current price is concerned, it’s trading almost at 50x earnings, so I'd be very cautious on new additions to this name.”
Enghouse has more than doubled since hitting its nadir of $36.61 on March 23, with the stock now trading in the $74-$75 range. Those gains reflect a company faring well, notably with its remote conferencing and telehealth/financial services video platform Vidyo, acquired last year. Other pickups including Espial, also acquired last year, and Dialogic, acquired early this year, have also shown growth in recent quarters.
Enghouse last reported on June 4 where its fiscal second quarter ended April 30 featured revenue up a full 58 per cent year-over-year to $140.9 million and EBITDA up 81.3 per cent to $49.3 million.
On the company’s business during COVID, management said the pandemic and its consequences have had “an overall positive financial impact.”
“Although the overall impact to revenues so far has been positive, sales of hardware, professional services and certain business units have been tempered as a result of procurement delays, deferral of on-site installations and customers postponing upgrades and implementations,” said Enghouse in its second quarter press release.
Driscoll said investors keen on participating in that growth might be well-served by taking a smaller position in Enghouse right now.
“If you want to dip your toe, there’s nothing wrong with doing a half-position and then seeing what happens down the road,” Driscoll said. “Stephen Sadler is a very good chairman and CEO, and they make small acquisitions but they never come at the cost of the business itself.”
“So all these little tuck in acquisitions just continue to add and enhance the offerings that the company has,” Driscoll says. “It’s a good name. The price is probably a little rich, but again, it all depends on how long COVID-19 is going to last and therefore how long people are going to get stuck at home. As long as we're stuck at home then I imagine their profits should continue to rise.”
Driscoll said investors should be holding some cash at this point, in case of another major market pullback.
“I just think it's very important that you keep your powder dry in the event that we do get a correction in the fall, to be able to take advantage of opportunities,” Driscoll added.