Technology consulting stocks may win the crown for this reporting season judging by their better-than-expected profit announcements.
The latest company in the sector to "wow" investors is Data#3 Limited (ASX: DTL) after management posted a 39.3% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $17 million as revenue improved by 4.4% to $870.5 million for the year ended June 30, 2015.
The stock surged 5.6% to a 20-month high of $1.03 in late morning trade and its strong performance follows SMS Management & Technology Limited's (ASX: SMX) solid profit announcement yesterday.
But it's not only the rise in profit that's triggering the rally in Data#3's share price. Management has increased its final dividend to 4.2 cents a share from the previous year's 3 cents a share. This takes total dividends for 2014-15 to 6.3 cents a share, which represents an increase of 40% over 2013-14.
The significant increase in dividend is supported by its strong operating cash flow, but there might be some concerns about the sustainability of its payout ratio, which currently stands at 91.5%.
This looks unsustainably high to me and that means investors should not expect dividend growth to continue to keep pace with earnings growth over the longer-term, although this is a minor negative in light of today's good profit result and the fact that the stock is still on a healthy yield of around 8-9% once franking is included.
The results prove that the group's transition from selling products such as software to selling services (like cloud-based solutions) is paying off as revenue from services grew 18.9% and gross margin increased to 14.9% from 14.3%.
It has not been an easy 12-months for IT consultants as government and business clients have cut spending in the face of an uncertain economic outlook but the good results from Data#3 and SMS is giving rise to optimism that clients are starting to spend on IT again.
Even more pleasing for Data#3 shareholders is the fact that management believes it is stealing market share in this lacklustre market.
Management did not issue profit guidance for the current financial year except to say its goal was to improve on the 2014-15 result, despite patchy trading conditions.
The stock looks cheap to me and I suspect investors will see around a 30% total return from the stock over the next 12 months.
