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Don’t miss out: This small cap IT stock is ready for a surge in earnings in 2015

What: Mid-cap IT company UXC Limited (ASX: UXC) on Thursday released full year earnings that failed to garner much attention from investors. Shares in the $270 million market-capitalised company rose by around 0.5% on the day after the company updated shareholders on what to expect.

The news was good; UXC generated record revenues of $643 million, increased recurring revenue by 29% to account for 27% of sales, generated $31 million in operational cashflow, integrated five acquisitions successfully, and paid down net debt to just $4.1 million.

This achievement was significant, as the company had forecast net debt in the region of $34 million, however early payment from happy customers made June a successful month and kept receivables at comfortable levels.

So what: The IT sector, particularly in Australia, has been extremely tough for a number of years. Government and private spending on IT services and hardware has been slashed as companies cut costs in the current low-growth environment.

This has been a problem for IT hardware and software suppliers who are competing for less work at lower margins, however most analysts also realise that there will come a time when all the companies that have delayed spending must upgrade infrastructure and software.

The upbeat stance of UXC’s report struck me as somewhat out of the ordinary for IT companies and with the company having made five acquisitions at a time when the market was struggling, UXC is in prime position for growth over the next few years. UXC is the dominant player in many fields, just the sort of quality investors like Warren Buffett are after:


Source: UXC results presentation.

What now: 2014 saw a contraction in margins for UXC’s Applications and IT Infrastructure divisions, however the consulting arm wisely focused on quality over quantity to boost segment margin. By 2016 UXC is targeting a 50% increase in consulting margin, a 40% increase in application margins, and a four-fold increase in IT Infrastructure margins.

This will be achieved by sourcing a greater proportion of earnings from overseas in the US, NZ, Fiji, India and Vietnam. There are also plans for strict cost controls while searching for more acquisitions. If achieved, net profit will rise by between 100% and 150%. On my estimates, UXC is trading on a FY15 price to earnings of around 14, and FY16 PE of 9. It also yields around 4.5%, which should be closer to 5% next year.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie