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The interior staircase in the open office space at Softchoice in Toronto. (Della Rollins For The Globe and Mail)
The interior staircase in the open office space at Softchoice in Toronto. (Della Rollins For The Globe and Mail)

Stock to watch: Softchoice deserves hard look after profit beat Add to ...

Softchoice Corp.

Wednesday’s close: $15 a share, up $2.30 or 18 per cent

52-week trading range: $10.51 to $15.48 a share

Annual dividend: 28 cents a share for a yield of 1.9 per cent (before dividend increase)

Analysts’ ratings: There were 5 buys, one hold and no sells, according to Bloomberg data. Target prices ranged from $14 a share from Thanos Moschopoulos of BMO Nesbitt Burns to $18 a share from Gabriel Leung of Paradigm Capital Inc.

Recent history: Shares of the North American provider of information technology, software and services have gained 26 per cent (including dividends) over the past year. Its stock hit a 52-week high on Wednesday after it reported a fourth-quarter adjusted profit of 48 cents (U.S.) per diluted share that beat analysts’ expectations of 39 cents. Revenue also grew 15 per cent from a year earlier to about $308-million versus expectations of $295-million. The company’s service business grew 65 per cent with help of its $17-million acquisition of Unis Lumin in 2011. Softchoice, which cut its quarterly dividend in 2008, reinstated a payout last August. On Tuesday when it reported results, the company announced it would raise its its quarterly dividend by 2 cents a share to 9 cents next month.

Manager insight: Softchoice has been transitioning from a company that mostly sold software from other firms like Microsoft Inc., its No. 1 supplier, to generating a recurring revenue stream from selling its own products. “We are still in a pretty lacklustre market for information technology spending, and yet these guys were able to grow revenues by 15 per cent,” noted Alex Sasso, chief executive officer of Hesperian Capital Management Ltd., which owns nearly 5 per cent of Softchoice’s stock.

The recurring revenue stems from a cloud-based service offering, and a networking business called Keystone. “The stock is up because investors have more confidence in their ability to generate these revenues and grow the revenues,” Mr. Sasso said. “Currently, it is less than 30 per cent of their revenues, and their goal is to get it between 30 and 40 per cent within 3 to 5 years.”

Softchoice boosted its dividend by 29 per cent so “it is now yielding more than 2.5 per cent and that’s on the back of an 18-per-cent payout ratio,” he added. “There is $68-million net cash on the balance sheet, and one of the things that pleased investors was that management said ... they were going to use it for additional acquisitions, stock buybacks or to increase the distribution in the future.”

The company has strong pipeline of products from Microsoft and also Cisco Systems Inc., and that combined with an improved economy in Canada and the United States, should serve them well,” he said. “Softchoice trades at 8 times earnings, has an 18-per-cent return on equity, very strong balance sheet and meaningful yield right now ... Given the strength of the [latest] quarter, outlook and new products, we think there is still upside.”

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