Should you sell your Enghouse Systems stock?

Paul Treiber says the valuation of Enghouse Systems (Enghouse Systems Stock Quote, Chart, News, Analysts, Financials TSX:ENGH) may remain under pressure following what he described as “another difficult quarter” for the Markham, Ont.-based software company.

As reported by The Globe and Mail, in a March 12 report, the RBC Dominion Securities analyst maintained his “Sector Perform” rating on Enghouse but lowered his price target to $20.00 from $22.00, citing weaker-than-expected organic growth, limited capital deployment and declining profitability.

Enghouse shares fell 15.5% after the company reported first-quarter revenue of $120-million, down 3% year-over-year and below Treiber’s $123-million estimate and the $125-million consensus forecast. Adjusted EBITDA declined 5%, while IFRS earnings per share of $0.32 also missed projections of $0.39 from Treiber and $0.36 from consensus.

“We estimate that constant currency organic growth was negative 13% in Q1, falling short of the negative 12% in our model and down from negative 11% last quarter,” Treiber said. “Enghouse is seeing continued customer churn and procurement delays in light of macro uncertainty.”

Maintenance revenue declined 4% year-over-year, reflecting the impact of negative organic growth. Following the quarter, Treiber lowered his organic growth outlook to negative 11% for fiscal 2026 and negative 7% for fiscal 2027, compared with previous estimates of negative 9% and negative 4.5%, respectively.

Treiber noted that while management sees a “better than attractive” environment for mergers and acquisitions, capital deployment has been limited in recent quarters. Over the trailing 12 months, he estimates M&A spending has amounted to 32% of free cash flow, while share buybacks accounted for 14%.

“Capital deployed over the last several quarters has been light on both acquisitions and share buybacks,” he said, adding that ongoing organic growth challenges have resulted in declines in revenue, Adjusted EBITDA, free cash flow and earnings per share on a trailing 12-month basis.

Treiber also said investor sentiment toward the company remains cautious in a difficult software market environment, despite management downplaying long-term disruption risks from artificial intelligence.

At current levels, Enghouse trades at roughly 5.0 times next-12-month EV/EBITDA, 11 times next-12-month earnings, a 15% free cash flow yield and a 7.8% dividend yield, metrics Treiber said represent 10-year lows for the stock.

“Given negative organic growth and poor sentiment for software stocks, we believe Enghouse’s valuation is likely to remain at trough levels,” he said.

Enghouse said its business continues to benefit from a recurring revenue base representing about 70% of total revenue, providing stability despite shifting macroeconomic conditions. During the quarter, the company completed the acquisition of Sixbell Telco, a Latin American provider of telecommunications and customer engagement software.

The company also returned $16.4-million to shareholders through dividends and repurchased $5.1-million of its shares, ending the quarter with $260.2-million in cash, cash equivalents and short-term investments and no external debt.

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