Should I Buy the Sage Group?

LONDON -- I'm window shopping for shares again, and there are plenty of goodies for sale. Should I popSage Group  (LSE: SGE  ) into my basket?

Sage investment?
Where the global economy leads, business management software specialist Sage Group follows. So revenues have been strong in robust economies such as the U.S., and across its Africa, Australia, Middle East, and Asia business, but have slipped in Europe. This is hardly surprising. Sage sells to the small and medium-sized business market, which is at the sharp end of global economic shifts. If the global economy recovers, Sage will surely follow. Should I buy into that?

Sage has held up pretty well, despite the downturn. Its share price has risen 20% over the past 12 months, against 13% for the FTSE 100 as a whole. Recent trading has remained "solid and in line with expectations," to quote management. Like so many FTSE 100 companies, the real excitement is coming from emerging markets, notably Brazil, where it has big expansion plans.

Software, hard times
Selling your services to smaller companies can be risky, given higher failure rate and lower barriers to entry, yet this market should also ensure a steady stream of new potential clients. With more than 6 million customers worldwide, Sage has a strong customer base, and management is wisely looking to build recurring subscription revenues to bring greater stability and lock clients into loyalty. Sage knows its onions.

Sage has been selling off non-core products in a bid to speed up growth, recently raising more than 93 million pounds by selling Sage ACT! and Sage Saleslogix to Swiftpage and Sage Nonprofit Solutions to Accel-KKR, although at a loss. The money is being returned to shareholders, who should also be pleased by its ongoing share buyback program. I would have hoped for a better yield from Sage than 3%, slightly below the FTSE 100 average, but a progressive dividend policy covered twice suggests it will continue to improve. Forecast yield is 3.3% for September 2013.

After a recent dip in earnings per share growth, Sage looks set to post a solid 10% growth in the 12 months to September 2013, followed by 9% in the subsequent year. I'm particularly impressed by its solid pre-tax profit growth, which has risen steadily, year after year, from 241 million pounds in 2008 to 334 million pounds last year, with forecast increases to 354 million pounds this year and 370 million pounds next. Perhaps I was unfair to compare Sage to the global economy, it has been a much smoother performer. The drawback is that this leaves it looking a little pricey, trading at 17 times earnings. Its price/earnings to growth ratio reflects that, at a toppy 1.6. Sage looks solid and safe, and the market clearly still sets a price on that.

Sage advice?
Brokers aren't too excited about Sage. Societe Generale has it as a "sell," while Panmure Gordon and Sanlam Securities call it a "hold." In fact, I can only find one "buy" rating in the last three months, from Citigroup. That strikes me as a little harsh, given the strong long-term profit growth Sage has been generating, and its resilience over the past five turbulent years. But maybe they find it a little expensive as well.

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