Cloud computing and datacentre specialist iomart (LON:IOM) produced a set of half year results that beat market expectations this week. For a company that has routinely delivered robust growth figures over the past three years, it was a performance that one broker described as “relentlessly positive”. But for many investors – particularly those that got their fingers burnt in the tech bubble – fast growing technology and telecoms companies generally carry a health warning these days. So how confident could investors be about a company like iomart?
In late 2010, long before Stockopedia’s advanced stock screening techniques had been developed, we spoke to iomart’s chief executive Angus MacSween about his plans to grow the company. That year the share price had risen from 50p to 90p and he was confident that as more SMEs and corporates embraced the advantages of third-party managed hosting and data storage, iomart was well placed to capitalise. Since then the company has bolted on a couple of acquisitions, added new clients and squeezed more revenue out of existing customers.
Anticipation of the latest interim figures – which saw revenues grow by 29% to 19.9m and adjusted PTP rise 66% to £4.9m – pushed iomart’s share price above 200p for the first time in its history. On just about every valuation metric, that price looks relatively expensive; for instance the forward P/E is 22.7x versus a sector average of 13.2x (see iomart’s stock screen here). At that sort of multiple, iomart is plainly way off the radar for value investors; and with only a very modest dividend (that fell slightly last year) income hunters probably won’t be interested either. In many respects, iomart fits the profile of a growth stock but currently it only qualifies for one of our guru growth screens – a screen that is performing particularly badly this year.
Screening for growth
We recently took a look under the bonnet of the investing formula developed by US strategist Charles Kirkpatrick. Using fundamental indicators and price momentum Kirkpatrick developed three mechanical stock selection strategies spanning bargain, value and growth stocks. Of those strategies modelled by Stockopedia, the growth formula has barely broken even so far this year – but it is the only screen that iomart currently qualifies for. It does so by just scraping over the £200m market cap requirement and being in the top 10% of the market for operating profit growth. The company’s share price also boasts a 130-day moving average rank in the top 20% of the market.
So, for a company with the qualities to pass Kirkpatrick’s screen and a strong share price rise over three years, why is it failing to make more of an impact on our other growth screens? The answer lies partly with what was going on back in 2008 and 2009 when MacSween and his team sold off a legacy directory business and began investing heavily in the hosting division. Those actions negatively impacted the company’s earnings per share (EPS) in those years. With many of our growth screens requiring three years CAGR in EPS, it won’t be until iomart’s 2013 numbers are out (assuming EPS grows again) that it makes its presence felt.
To give you an idea of how close it is getting to meeting some of these demanding growth criteria, you only need look at how it shapes up against our interpretation of Bill O’Neill’s CAN-SLIM screen. O’Neill looks for stocks with strong earnings over the recent past as well as positive price momentum, which are both easily met by iomart. However, he also looks for a Return on Equity of 15%, which is a level generally considered desirable among investors. Iomart’s ROE of 14.8% in 2012 means it misses out on passing the CAN-SLIM screen by a wafer thin margin. The CAN-SLIM portfolio has seen a year to date return of 15.9% versus 4.1% for the FTSE 100.
What does it all mean?
A screening-based approach to stock-picking won't highlight every stellar outperformer and, interestingly, perhaps this is one of the ones that has got away... so far. Reading MacSween’s views on the most recent trading period, it appears that the confidence he displayed two years ago has simply grown stronger in the intervening period. In terms of the company’s fundamentals, it needs to keep up the same momentum that it has shown of late for it to qualify as a regular growth stock contender on the investing screens we're modelling.
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Filed Under: Growth Investing,