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Why Infomedia Limited shares are going nuts on a broker report

Credit: Dmitriy

The share price of car parts software company Infomedia Limited (ASX: IFM) has rocketed higher by over 6% today following the release of a research note from Bell Potter that rates it a buy with a 75 cents price target.

This will be a welcome relief to shareholders who have endured a difficult 12 months. During this time the share price has dropped a massive 45% from its 52-week high of $1.17. Whilst this price target still falls well short of that high, it is a step in the right direction.

These declines stem from a disappointing half year result. Although the company delivered half year revenue growth of 16% to $33.9 million, on the bottom line profit dropped 14% to a disappointing $6 million.

Further compounding shareholder misery was its profit downgrade announcement in May relating to restructuring costs. The announcement revealed full year profit would drop by around 30% to be in the range of $10.2 million to $10.5 million.

Management revealed that it expects these restructuring costs and investments for growth will be a benefit to the company in fiscal 2017. It would appear as though Bell Potter analysts agree with this view and see the company turning a corner next year.

With the shares changing hands at approximately 19x forecast full year earnings, I wouldn’t necessarily class them as being cheap. But if the company can turn its fortunes around then there could be a rewarding long-term investment here.

I feel it might be best to wait and see what the full year results reveal before making an investment. In the mean time I would highly recommend taking a closer look at ARB Corporation Limited (ASX: ARB) and Burson Group Ltd (ASX: BAP). In my opinion both are quality shares with strong tailwinds supporting their long-term growth.

Before you invest in any of these I would suggest checking to see if you own one of these three rotten ASX shares. Each could be damaging your portfolio's prospects and might be best taken out if you ask me.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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