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The ASX’s largest software company Technology One Limited nears 52-week high: Should you buy?

Despite having a market capitalisation of $1 billion Technology One Limited (ASX: TNE) is far from a widely-followed stock.

The resumption of trading on Tuesday after the Australia Day long weekend, has seen the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) jump 0.8% by late afternoon; meanwhile Technology One (Tech One) has bolted over 4% higher despite no market announcements. By mid-afternoon the share price has hit an intra-day high of $3.35 which means the stock is only 22 cents from the 52-week high of $3.57, which was reached back in November 2014.

Outstanding long-term total shareholder returns (TSR)

The gains for shareholders from owning this stock have been exceptional. Over the past one and five years, the share price (excluding dividends) has produced returns of 49.5% and 337% respectively.

Including dividends, the TSR has been a superb 44.3% and 49.7% per annum over one and three-year time intervals respectively.

These enormous returns have pushed Tech One’s share price up to significant heights – based on analyst consensus data provided by Morningstar, the stock is trading on a financial year 2016 price-to-earnings ratio of 25.6x. This doesn’t leave investors with much breathing room for error. Despite the high share price, there remains a number of reasons to suspect the underlying business performance of Tech One will continue to grow solidly in future periods.

R&D – The company spent 19% of revenue, equating to $38 million, on research and development (R&D) during the 2014 financial year (FY). This level of spending sets the group up to continue to innovate and drive growth in product development in future periods.

Cloud – Tech One is well positioned to win work as enterprises move their systems onto ‘the cloud’. In FY 2014 the group secured 15 enterprise cloud deals across Australia, New Zealand and the UK.

Proven performer – While most companies choose to only provide investors with the bare essential financial data and often ‘dress it up’ with management trying to position the results in the best possible light, at Tech One, management gives you a full picture of the company’s health and provides 15 years of data to sink your teeth into – it’s certainly a pleasant change. Of note is a return on equity which has held above 30% for a number of years and a 15-year compound earnings per share growth rate of 13% per annum.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.

 

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