Is Enghouse stock a buy?

It’s been a rough ride for most stocks in the tech sector this past while and that goes double for Canadian enterprise software name Enghouse Systems (Enghouse Systems Limited Stock Quote, Charts, News, Analysts, Financials TSX:ENGH), which over the past 12 months has lost about half of its value. And while there may be more downside to the current market mood, portfolio manager Darren Sissons thinks Enghouse is one to watch as its M&A strategy has been proven highly successful.

“If you look at the the ecosystem that Enghouse sits in, you’re talking Constellation Software, you’re talking OpenText and so forth, and what you’re really seeing is a growth by acquisition roll-up software model,” said Sissons, vice-president of Campbell Lee & Ross, speaking on BNN Bloomberg on Friday.

“Obviously, that has been a very successful model,” said Sissons.

Enghouse, which focuses on communications-related software including contact centres, video, remote work and network communications, saw its offerings in higher demand over the first stretch of the pandemic as business meetings went virtual and work-from-home became the norm. But with the return to the office and increased competition in the space, Enghouse is feeling the pressure.

The company reported second quarter fiscal 2022 earnings earlier this month which were below analysts’ consensus expectations, with revenue down 9.4 per cent year-over-year to $106.3 million and adjusted EBITDA down a full 16 per cent to $33.8 million. Management pointed to unfavourable foreign exchange as a factor as European currencies came under pressure due to the war in Ukraine but also tougher competition in the Cloud related to Enghouse’s Interactive Management Group business segment which includes its contact centre, unified communications and workforce management software and services.

“While we differentiate ourselves from our competitors by providing customers choice between on-premise solutions, private cloud and multi-tenant cloud offerings we are augmenting our existing channel-partner model with additional focus on our direct go-to-market approach for our cloud solution that is still in the early stages of its global roll-out,” Enghouse said in a June 7 press release marking the fiscal second quarter.

But even from the M&A perspective Enghouse seems to be stalled, with new deals being few and far between lately. The company acquired French SaaS enterprise video software company Momindum SAS last July to bulk up its suite of offerings under its Vidyo banner and before that bought Amsterdam-based research and analytics software company Nebu BV but there’s been no movement since, a potential problem for investors who may be counting on a name like Enghouse to be pumping up its top and bottom lines on a regular basis through acquisitions.

For its part, Enghouse says it has just been waiting for the right opportunities and they’ve hinted that the time to pounce may come soon.

“With rapidly increasing interest rates, declining public tech values and the possibility of rising taxes, valuations are becoming more realistic in terms of meeting our financial criteria,” said CEO Stephen J. Sadler in the fiscal second quarter conference call. “It is true that we have not completed any acquisitions for about a year, but we have maintained our financial discipline which seems to have been the right strategy considering the substantial recent decline in tech valuations. Our growing cash balance [and] no financial debt put us in a very good position for the future. Sometimes it’s best to be patient, deploy ones cash to get the best long-term return for shareholders.”

But combine Enghouse’s recent lacklustre performance with the general market rotation away from growth-related stocks and you’ve got a lot of recent pressure on the stock which is now down about 45 per cent year-to-date and down about 65 per cent over the past two years. 

“All of the [Canadian tech consolidator] names are off meaningfully,” Sissons said. “But I think what you have seen on the fundamental side is a company that’s grown its revenues quite meaningfully and earnings have moved up quite nicely.”

“The question is going to be is the company going to be able to continue to execute their strategy moving forward and the likelihood of being able to be a quality buyer in a distressed environment,” he said. “I would suggest that Stephen Sadler who runs the economy is good operator, and [the stock] might be worth taking a closer look at. If it goes down further I’d be much more interested.”

Sissons said with the whole tech space selling off en masse there are some good businesses whose lowered share price makes them more attractive and that includes Enghouse.

“Really understand what you own, understand the business model and if you can do that correctly you’re going to make some money here,” Sissons said. “I would say there might be a little bit more downside for Enghouse, but it’s worth looking at as are the other two names that I mentioned.”