Here are two technology stocks that offer capital gains potential over the next few years.
We’ve upgraded US technology stock Motorola Solutions Inc. ( NYSE—MSI) to a buy for long-term share price gains and modest, but growing, dividends. Since we published our November 20, 2020 issue, its shares went up by 14.5 per cent. They have moderate upwards share price momentum.
Motorola provides communications infrastructure devices, accessories and software as well as services. The company operates two segments: products and systems integration as well as services and software.
In 2021, Motorola’s earnings are expected to grow by 12.1 per cent, to US$8.62 a share. Based on this estimate, the shares trade at a P/E (price-to-earnings) ratio of below 21.9 times. This seems reasonable for a company with solid earnings growth. Next year, Motorola’s earnings are expected to advance by 10.8 per cent, to $9.55 a share. This gives the shares an even better forward P/E ratio of 19.7 times.
One strike against Motorola is that it has retained losses, as opposed to retained earnings, of $3.29 a share. Even so, we’ve upgraded Motorola Solutions for long-term share price gains and modest, but growing dividends. Motorola is now a buy.
Earnings to fall in 2021, recover in 2022
Quarterhill Inc. (TSX—QTRH) was formerly WiLAN Inc. It remains a buy for long-term share price gains and decent dividends. But only if you can accept buying a stock that we rate ‘Speculative’.
Since we published our November 20, 2020 issue, Quarterhill’s shares have declined by 1.9 per cent. This means that they have no upwards momentum. On the positive side, the shares remain well priced. They trade below their book value of C$2.91 a share.
In 2021, Quarterhill’s earnings are expected to fall by nearly 22 per cent, to C$0.18 cents a share. Based on this estimate, the shares trade at a reasonable P/E (price-to-earnings) ratio of 14.2 times. In 2022, the company’s earnings are expected to partly recover by 11.1 per cent, to C$0.20 a share. Based on this estimate, the shares trade at a better forward P/E ratio of 12.8 times.
One drawback is that Quarterhill’s earnings are failing to cover its dividend of 32 cents a share. At first glance, it looks as though the dividend might be at risk. But thanks to the company’s excellent balance sheet and strong cash flow, we believe the dividend is safe.
On New Year’s Eve, Quarterhill held cash of US$135.7 million and short-term investments of nearly US$5.6 million. This greatly exceeded total debt of only $3.8 million. Also, the company generated cash flow of US$27.7 million in 2020. This also gives the company the means to reinvest in its businesses. Buy.
This is an edited version of an article that was originally published for subscribers in the April 16, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •5/6/21 •