This case study is taken from Jim Slater's The Zulu Principle.
We have deliberately used an example from the late eighties and early nineties so that there is no suggestion of this stock being recommended (or not recommended) in the current market. The case study is an example of the way a growth stock can be analysed. It is not the only way a growth stock can be analysed.
Sage is a supplier of accountancy software:
In The Zulu Principle, a year after the flotation when the shares were 203p, Jim Slater described how the stock fitted into his 'system'.
|The EPS figures for Sage|
prior to flotation were:
Although 1990 earnings did not increase at the same rate as the previous three years, 50% is still a phenomenal growth rate for a company of Sage's size.
At 203p, the shares were priced at less than 11 times 1990 net earnings and at less than 9 times estimated 1991 earnings. Although the growth rate looked like slowing to a more sustainable 25% per annum, the shares were still obviously cheap with an historic PEG factor of only 0.44 and an astonishingly low prospective PEG factor of 0.36.
In December 1990, the Chairman said:
'In the first two months of the current year, we have exceeded our internal targets. Despite the hostile business environment, we are confident that 1991 will be another year of continued growth.'
You could hardly ask for more.
Strong cash flow and £5.5m of net cash, amounting to 17% of market capitalisation, easily satisfied this condition.
A successful strategy coupled with a high level of advertising meant that Sage was continuing to increase market share and margins, despite very difficult conditions generally. Sage had about 40% of the market in small business accounting software in the UK and was growing in the US. There were also many opportunities opening up in the Third World and Eastern Europe.
The financial difficulties being experienced by the company's main rival, Pegasus, were helping growth of market share in the UK.
At 203p the market capitalisation was a very attractive £33.1m.
The relative performance against the FT Actuaries All-Share Index was very positive.
The yield was a very satisfactory 4.6%. 1990 was the first year a dividend was paid as a public company.
Negligible tangible assets, although £5.5m in net cash. The company also had valuable intellectual properties.
Directors owned 37% of the shares worth more than £12m, giving them the owner's eye.
Clearly the stock fitted Jim Slater's system extremely well.
Note: The above example is an historical example of Sage's performance in a particular period, and should not be interpreted as a representation of Sage's current trading position nor of its value as an investment.