RE: SOPHOS, Massive Potential......5 Jan 2018 12:20
SOPH Sophos.....Hargreaves Lansdown tip 4 of 5 for the top 2018......
Investment idea #4
<b><u>Sophos Group - benefit from the cyber threat</b></u>
<b><i>A string of high-profile hacks mean the consequences of not investing in cyber security are all too evident.
Perhaps no surprise then, that companies are scrambling to shore up their cyber defences. Sophos Group, a company providing software to protect small and medium-sized businesses, should benefit from this.
The group uses a network of over 30,000 independent partners to sell and distribute its products. Over 100m users in 150 countries now rely on it for IT security and Sophos says the market is worth in the region of �40bn, and growing quickly.
It is the only company to offer a high standard of both network and end user protection. This means customers benefit from a joined up service under a centralised system.
Contracts run for up to five years, retention rates are impressive and last year Sophos generated an average of 29% more business from contracts up for renewal.
At present, the company is focused on investing in this opportunity rather than paying dividends, meaning the prospective yield is just 0.8%.
With impressive growth, Sophos's potential hasn't gone unnoticed by the market though.
The shares have enjoyed a strong run recently, and trade on a premium valuation of 85 times expected earnings. We�re not put off by the high rating, but it certainly adds a layer of risk. If the company fails to deliver on the market�s high expectations, the share price could suffer.
Part of the reason the rating is so high is that accounting convention means Sophos's near-term earnings look artificially low. The costs of winning a contract are accounted for up-front, but the revenues are spread over the life of the deal. For example, the group generated $133m of free cash flow last year, compared to adjusted profits of $38m.
We often look at a company and say profits look great, but where is the cash? With Sophos, in the short-term at least, it's the other way round. Given the choice, this is how we'd like it. After all, it's not without justification they say cash is king.</b></i>
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