Why the Infomedia Limited share price is going gangbusters today

Infomedia Limited (ASX:IFM) shares are rising on takeover speculation.

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Shares in software-as-a-service automotive business Infomedia Limited (ASX: IFM) have climbed 6% to 72.5 cents this morning probably because of media reports that the company may be subject to a takeover offer.

According to The Australian Financial Review a private equity operator is weighing up the business presumably with the intention of making a bid to take ownership.

Infomedia has some attractive qualities in terms of its scalable business model, balance sheet strength, overseas exposure and decent profit margins. However, it has something of a mixed track record that includes a recent boardroom bust up over the company's strategic direction and news that competition may be rising across the sector.

Consequently earnings per share and the share price fell over the course of financial year (FY) 2016, with the company now forecasting for FY 2017 revenue growth to be in the high-single digits. At its current share price the company trades on around 22x trailing earnings, with expectations that FY 2017 will see a marginal uplift in earnings.

The stock looks fully valued for now given that its outlook remains mixed, with the management team having work ahead of them to demonstrate that its restructuring and investments in growth will pay off. However, if a private equity bidder does try to buy the company it will likely have to stump up a substantial premium to today's valuation.

A better option than Infomedia for investors in the software-as-a-service could be Kiwi cloud accounting outfit XERO FPO NZX (ASX: XRO). It is growing quickly and a potential move to profitability in the years ahead could trigger the market's approval and share price gains.

Motley Fool contributor Tom Richardson owns shares of Xero. The Motley Fool Australia owns shares of Xero. You can find Tom on Twitter @tommyr345 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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