Shares in many "stay-at-home, work-from-home" companies have been tracking the sell-off in broader markets, especially in technology stocks. A large number of market participants are possibly becoming unnerved. After all, it is impossible to know if the decline is an expected short-term profit-taking or the start of a potential correction that may extend well into the last quarter of the year.
However, such market declines also present an excellent opportunity to buy quality shares and funds at lower prices. Today, we'll introduce two members of the FTSE 100 that long-term investors may want to keep on their radar screen.
Sage
Accountancy software firm Sage Group (LON:SGE) (OTC:SGPYY) has been in business for almost four decades. Globally, it is one of the suppliers of enterprise resource planning software, enabling companies to manage finances, operations and people. Sage focuses primarily on small and medium businesses and has more than 6 million customers worldwide.
In terms of the geographical location of customers, the U.S. tops the list with around 37%. Next is central and southern Europe (32%). The UK and Ireland account for most of its income from northern Europe (21%). The rest of the world accounts for about 10% of revenues.
We believe its software products give Sage a strong competitive advantage. First, about 90% of the revenue is recurring, including software subscription and other recurring revenue (i.e. maintenance and support from on-plan customers).
Analysts and investors typically love recurring-revenue business models as they mean relatively stable and predictable cash flow levels. Companies also have an easier time planning and making investments.
Secondly, not many companies change accounting and enterprise software. It can be complicated to switch to a new provider.
Earlier in the summer, the group provided a robust trading update for the nine months that ended 30 June. Recurring revenue increased by 9.0% to £1.25 billion (around US$1.6 billion), thanks to software subscription growth of 22.6%. The company has been pushing to move customers into the cloud.
Management was also pleased with the cash and available liquidity levels of £1.2 billion (or US$1.55 billion). Its net debt is £226m (US$291 million). Overall, the balance sheet is strong.
The stock closed yesterday at 727p ($37.99 for U.S.-based shares) which supports a dividend yield of about 2.2%. So far this year, the stock is down more than 3%. However, its comeback since the lows seen in March has been strong.
Yet, its shares have come under pressure since late August. Its forward P/E/ and P/B ratios of 25.77 and 4.09, as well as short-term technical chart analysis, suggest that market participants may decide to take some more money off the table.
Given the softness in tech shares, Sage stock may decline another 5%-7%, which would present a suitable entry point for long-term investors. We expect the company to grow strongly in its fifth decade.
Just Eat Takeaway.com
Just Eat Takeaway (LON:JETJ) (OTC:TKAYF) is another FTSE 100 member that is seeing robust growth in 2020. The company operates an intermediary portal, promoting restaurant clients and facilitating payments. Individuals order food online from restaurants, which is then delivered directly to their addresses.
Like many other similar companies worldwide, due to the pandemic, Just Eat has benefitted from increased food consumption at home. Thanks to its headquarters in the Netherlands, its European operations are also strong.
In mid-August, it released half-year 2020 results, which showed the UK, Germany, Canada, the Netherlands, Australia and Brazil were performing particularly strongly. Overall, the company processed 257 million orders in the first six months of 2020, representing a 32% increase year-over-year.
“Just Eat Takeaway.com is in the fortunate position to benefit from continuing tailwinds,” said CEO Jitse Groen. “We are convinced that our order growth will remain strong for the remainder of the year.”
Management plans to capitalize on the encouraging numbers and drive growth. The group also plans to acquire Grubhub Inc (NYSE:GRUB) in an all-stock transaction. The resulting entity will become the world’s largest online food delivery company outside of China, measured by gross merchandise value (GMV) and revenues. The transaction is expected to finalize in the first quarter of 2021.
Year-to-date, the stock is up around 10%. It closed yesterday at 8,350p ($119.40 in the U.S.). As a result, current valuation is high, even for a growth company. Forward P/E and P/B stand at 85.47 and 9.63, respectively. The current decline in broader tech shares will possibly continue to put pressure on JET stock, too.
Since we believe food delivery demand will stay high in autumn, we’d look to buy the dips in JET shares, especially if they decline about 7%-10%.