MENU

3 performance boosters in information technology

There are 58 software and services companies listed on the ASX. Three who rate particularly well on management quality and medium-term earnings potential are SMS Management & Technology (ASX: SMX), Integrated Research (ASX: IRI) and Technology One (ASX: TNE). Should you add them to your portfolio?

SMS Management & Technology
Major Activity: Services

SMS Management & Technology provides systems and technology integration solutions through offices in Australia, Hong Kong, Singapore and Vietnam. Its major customers are involved in financial services, digital data management, defence, health, utilities, infrastructure and mining. Although there is a degree of stability in having these organisations on its books, there are also potential risks as government policies change and the resource boom subsides. SMS recently announced it has acquired Indicium, further deepening involvement in cloud services.

SMS Management & Technology stacks up on indicative 2014 projections: P/E ratio of 9, return on equity of 32% and a grossed up yield of 8.5%. With good management and no debt, SMS Management & Technology appeals as a conservative investment with an attractive yield. Its medium-term growth prospects are reasonable.

Integrated Research
Major Activity: Software

Integrated Research focuses on developing performance monitoring diagnostics and reporting software. The major proprietary offering is Prognosis, a real-time performance software suite which is gaining industry acceptance worldwide. Existing customers include airlines, banks, stock exchanges and telecommunication companies. Approximately 20% of revenues are expended on research and development.

Here’s how its indicative 2014 projections look: P/E ratio of 15, return on equity of 35% and a grossed up yield of 6.2%. One caution — protracted licensing talks with some major customers may impact 2013 earnings. With active management, no debt and proprietary software tied into strong growth segments (mobile communications, performance reporting, information technology) IRI is fairly compelling as a well founded medium growth story. Given the high exposure to international currencies, a weakening Australian dollar is an added bonus.

TechnologyOne
Major Activity: Software

TechnologyOne develops and supplies software for industries and organisations in the fields of financial services, health, education, community services, utilities and local government. Interestingly, TechnologyOne does not use resellers or outside support parties when implementing or servicing their customers. On average, 20% of annual revenues are spent on research and development. Listed in 1999, TechnologyOne claims to be Australia’s largest enterprise software developer.

Here’s a look at its indicative 2014 projections: P/E ratio of 17.8, return on equity of 41% and a grossed up yield of 5%. At current prices TechnologyOne looks fully valued – patience may pay off here and it is worthwhile adding this one to your watchlist.

Foolish takeaway

All 3 companies occupy their own niches in an ever developing industry. Over the past few years the information technology sector has been in a mild bear cycle as many major companies cut or delay IT capital spending. Slowly improving international economies and the pressing need to implement efficiency controls could be the catalysts to turn this bear.

In the market for high yielding ASX shares? Get 3 Stocks for the Great Dividend Boom in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading


Motley Fool contributor Peter Andersen owns shares in Integrated Research.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.