Now and again, otherwise sophisticated companies make a blunder with unexpected announcements and then worsen it with inadequate or no clarification. Here are two recent examples.
Integrated Research (ASX: IRI) is a Sydney-based company involved in the design, development and implementation of management reporting software specific to large enterprises and unified communications networks. Its major software suite is Prognosis, which has achieved significant international acceptance, particularly in the US. The list of customers reads like the Forbes 100, and Integrated Research has all the characteristics of a progressive company.
That was all well and good, until a paltry announcement on 27 August stated that CEO Mark Brayan was leaving his position that day and would be replaced by Darc Rasmussen, effective on 8 October 2013.
What should investors make of this? Uninformed speculation is pointless, and this Fool reacts by again checking the 2013 accounts. Integrated Research remains debt-free, has a 30% return on equity, good operational cash flow, expenses research and development, and exercises good cost controls – in short, it is a well run company. On 31 July 2013, cash in the bank stood at $18.1 million.
In 2013 Americas revenue was up 6.4%, however both Asia Pacific (down 13.5%) and Europe (down 3.6%) were disappointing. The Americas share of total revenue was 72%.
Perhaps the above is the key to the abrupt change in top management. Mr Rasmussen is a very experienced global executive with the credentials to move Integrated Research into the next stage of growth – especially in Asia and Europe. It has to be acknowledged that Mr Brayan's tenure was extremely productive for both the company and shareholders.
Given this, the thesis for investing in Integrated Research remains valid – it is a successful company with 2013 price earnings of 19, a strong balance sheet and good cash flow. Most importantly, it is involved in a high growth segment of the global IT industry.
Metcash (ASX: MTS) is a wholesale distribution business with divisions specialising in grocery, fresh produce, hardware, liquor and automotive parts and accessories (75% owned). Well known outlets include Mitre 10 and IGA.
The 'surprise in a box' was the revelation of a "high single digit" 2014 profit downgrade, just weeks after presenting the 2013 results. Needless to say, the share price fell sharply and hasn't done much since. Is there something fundamentally wrong with the Metcash strategy?
The retail partners of Metcash have to compete with Coles and Woolworths if they want to stay in business. As a wholesaler, Metcash just doesn't have the buying power to supply them at reasonable margins. What's worse, Metcash duplicates functions by having both national and state buying facilities! Unless it does something about this, it is doomed to be an inefficient business.
Its 2012 results were impacted by impairment and restructuring costs associated with the Franklins purchase (a disaster). As a result of this and the need for capital, an equity raising was undertaken. Part of this was used for Project Mustang, an advanced warehouse facility. Mustang is one step to productivity improvements.
The company has had a fairly uninspiring recent history, however the new CEO may have plans to refine the business and produce earnings growth. As yet, shareholders simply don't know.
Foolish takeaway
Integrated Research is a high margin business in an ongoing growth cycle whereas Metcash is a low margin business attempting to hold its position. At 95c, Integrated Research is selling at 13.6 times projected 2014 earnings (7c per share) and a partly franked yield of 5%. By comparison Metcash ($3.22) is selling at 11.5 times estimated 2014 earnings and a 7.5% fully franked yield. Although income investors may prefer Metcash, Integrated Research has the better growth prospects.
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Motley Fool contributor Peter Andersen owns shares in Integrated Research.
