Iress: More Defensive Than Perceived?

In times of market turmoil defensive names increasingly attract attention. For many in the market this suggests stocks such as healthcare plays and supermarkets. According to ABN Amro another name to add to the list is Iress Market Technologies (IRE) as the data processing and outsourced services group offers many of the same characteristics.

The company’s 2008 profit result supports the notion as underlying earnings pre-significant items of $48.5 million was up 24% on the comparable prior year result while dividends were increased to 31c for the year, an increase of 19%. As well, the broker notes the result was accompanied by cautiously optimistic outlook comments from management, this despite increasing earnings headwinds from the economic downturn (not to mention the fact that the company’s main client base is in the financial sector).

The result suggests this optimism is well founded as all divisions performed solidly last year, with the Canadian operations beating the broker’s number by around 18% and the Australian and wealth management operations coming in just above its forecasts.

Post the result the broker makes only minor adjustments to its earnings estimates, meaning its earnings per share (EPS) forecasts now stand at 40.5c this year and 44.9c in 2010, these are against the 39.2c delivered in 2008. Citi is a little more cautious with its numbers and forecasts EPS of 37.1c and 40.c respectively, but the broker makes the point the group’s balance sheet is in good shape and cash flows are strong.

This sets the company up for solid growth in earnings when conditions do eventually improve, while the cash on balance sheet of around $46 million means further accretive acquisitions cannot be ruled out. Macquarie agrees with the positive outlook assessment, suggesting the market has in fact got it wrong with respect to the stock as it is assumed there will be subscription losses during the economic downturn but this is not as yet being borne out by results.

In Macquarie’s view earnings volatility for the company is relatively low and returns are relatively high. As the balance sheet is ungeared the current earnings result and recent share price pressure offer an attractive entry point for investors, says Macquarie. To reflect this the broker has lifted its forecasts slightly post the result.

UBS is similarly positive as in its view earnings risk over the next couple of years remains to the upside compared to market forecasts. Given the number of companies revising down earnings and delivering disappointing results it is reasonable to expect any positive earnings surprises in the current market will be rewarded, suggests UBS.

According to the FNArena database consensus EPS forecasts for the company are 38.6c in 2009 and 40.5c in 2010, while post the result the stock is rated as Buy five times and Hold three times. One of those with a neutral view on the stock is Deutsche Bank, the broker arguing while the company is doing a lot of things right it is simply unlikely to outperform while it is battling significant earnings headwinds.

To reflect its view the broker has a $5.30 price target on the stock, well below the average price target according to the database of $6.11. This average is down from $6.24 prior to the result, with much of the change due to Credit Suisse cutting its earnings estimates and price target to $7.00 from $7.75 following a change in analyst covering the stock.

At the other end of the market are Citi’s increases in forecasts in coming years by 11-14%. This led to an 8% lift in the broker’s target price to $6.19, while Macquarie lifted its target to $6.06 from $5.25 post the result.

Shares in Iress today are slightly higher despite a weak overall market and as at 11.15am the stock was up 2c at $4.94. This compares to a trading range over the past year of $3.54 to $7.48.