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DWS Ltd vs. RXP Services Ltd: Which IT share is the better buy?

Credit: Printed Circuit Corporation.

Over the past 10 days, investors have had the opportunity to review the results of a number of the ASX’s leading information technology (IT) service firms.

For a recap on some of those results, take a look at The Motley Fool’s coverage of RXP Services Ltd (ASX: RXP), Data#3 Limited (ASX: DTL) and SMS Management & Technology Limited (ASX: SMX) by clicking on the respective hyperlinks.

A fourth tech service company to report recently was DWS Ltd (ASX: DWS). The market responded positively to DWS’s results with the stock jumping 8.5% to a new 52-week high of $1.41.

Here’s what got investors excited…

  • Revenue increased by $50 million (or 53%) to $144.5 million thanks largely to two acquisitions which contributed revenue of $45.5 million
  • Underlying earnings before, interest, tax, depreciation and amortisation grew 63% to $26 million with the margin expanding 1.1% to 17.9%
  • Earnings per share increased 62% to 12.74 cents per share (cps)
  • Cash balance remains steady at approximately $10 million; debt expanded to $24 million due to acquisitions
  • A fully franked dividend of 5 cps, up 33% has been declared

While DWS’s results were indeed impressive, in my opinion, RXP could be an even better bet. Here’s why…

Utilising forecast data for FY 2017 provided by Reuters, the price-to-earnings (PE) ratio of the above four stocks is:

  • Data#3: 16.3 times
  • SMS Management & Technology: 14.7 times
  • DWS: 10.4 times
  • RXP Services: 8.4 times

Based purely on the PE ratio, RXP could be considered “cheaper”. However it’s the outlook statements of each company that reinforces my preference.

DWS’s management failed to give any hard guidance but did note that: “The industry remains highly competitive as larger customers seek to refresh contracts. This is offset by increased demand due to new projects.”

In contrast, RXP’s management stated that it expected “revenue to grow in the range of 10-15% over FY17, and we maintain our target EBITDA margin of 13%-14%.”

The combination of the lower PE, coupled with the positive outlook statement leads me to favour RXP.

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Motley Fool contributor Tim McArthur 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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