2 technology stocks to buy

Here are two Canadian technology stocks to buy. One provides equipment and technology to TV and new-media; the other provides software and services to a variety of users.

Evertz Technologies Ltd. (TSX—ET)

According to RBC Capital Markets analysts Paul Treiber and Boyang Li, the lack of live sports and other events is likely to weigh heavily on technology stock Evertz Technologies Ltd.’s first quarter revenue and adjusted EBITDA. The analysts say they believe the next quarter may show a sequential improvement, given the easing of travel restrictions and social distancing, along with the return of live sports.

However, they do point out that long-term industry structural challenges are likely to persist. They maintain their Sector Perform rating.

Evertz reported quarterly revenue of $56.3 million for the first quarter of 2021, (period ended July 31) compared to the analysts’ estimate of $83 million.

The analysts note: “With COVID-19 travel and social distancing restrictions easing through the summer and live professional sports returning, we expect demand to improve from the lows in May. While postponements of live events are temporary, we believe that the structural challenges facing live broadcast-equipment demand would be sustained or may accelerate.

“North American television subscribers declined 7.9 per cent year-over-year in the second quarter of calendar 2020, down from -7.5 per cent in the first quarter 2020” according to RBC’s telecom research team.

“Long-term structural challenges may continue to weigh on the stock. Evertz’s share price has declined 32 per cent year-to-date (versus the S&P 500 11 per cent growth) and is trading near multi-year lows. We believe the shares may remain at depressed levels pending a full recovery in near-term demand and better visibility to Evertz’s exposure to emerging opportunities like over-the-top applications and software.”

Founded in 1966, Evertz Technologies is a global leader in broadcast and entertainment technology solutions. The company provides network, distribution and content management solutions to creators, broadcasters, television service providers and telecommunications companies. Evertz is one of the leaders in helping the industry transition to IP, with more than 400 global deployments of IP-based solutions since 2014. The company is based in Burlington, Ont. and has more than 1,400 employees.

Enghouse Systems (TSX—ENGH)

Messrs. Treiber and Li shared lofty third-quarter 2020 (period ended July 31) results expectations for technology stock Enghouse Systems Ltd.

Their model calls for revenue to rise 28 per cent year-over-year (five per cent organic) to $130 million in the third quarter, compared to consensus at $135 million ($131 million excluding outlier). On strong organic growth, they expect adjusted EBITDA to rise 42 per cent year-over-year to $40 million. Their third-quarter revenue growth expectation ranks in the top quartile and third-quarter adjusted EBITDA growth ranks top 10 among Enghouse’s last 10 years. As such, the analysts give the stock an Outperform rating.

The analysts say: “We forecast Enghouse’s constant currency organic growth at five per cent in the third quarter, well above the company’s 10-year historical average of -1 per cent. Enghouse’s software portfolio is focused on remote working (includes video conferencing, contact centers, telecommunications), which is seeing stronger demand amidst COVID-19 work-from-home initiatives.

“Acceleration of Vidyo downloads remains sustained. According to Sensor Tower, downloads of major video conferencing apps remain elevated well above pre-COVID levels.

“Downloads of Enghouse’s video conferencing apps Vidyo Connect and Vidyo Mobile increased approximately 2300 per cent year-over-year to 490,000 in the third quarter of 2020 (May-July), stronger than the approximately 1600 per cent year-over-year increase (to 431,000) in second quarter of fiscal 2020 (Feb-April).

“Moreover, the magnitude of growth in Vidyo downloads ranks between Zoom and Webex. Zoom experienced 3100 per cent year-over-year increase in downloads, whereas Webex’s downloads rose 1600 per cent in the quarter from May to July. We believe COVID has structurally raised demand for video conferencing solutions in the long term.

“Enghouse has created significant shareholder value through acquisitions. Management has commented that the M&A environment remains attractive. Among Canadian software consolidators, Enghouse utilizes the second-highest hurdle rates for acquisitions.

“However, we believe Enghouse’s valuation does not fully reflect potential upside from acquisitions compared to other consolidators. With estimated $185 million cash in the third quarter, we believe that potential acquisitions represent a catalyst for the stock.”

Enghouse Systems is a Markham, Ont.-based enterprise software company that acquires and manages software for several vertical markets. The company is organized into two business units: Interactive Management Group and Asset Management Group. The Interactive Management Group focuses on communication software and services for contact centers.

The Asset Management Group provides software and services for the management of complex network infrastructure in the telecommunications, utilities, transportation, and oil and gas sectors. Enghouse has completed 44 acquisitions since 2002, which have helped to expand the company’s revenue by more than 27 times.

Enghouse is a Canadian-based, publicly-traded company that provides enterprise software solutions focusing on remote work, visual computing and communications for next generation software defined networks. The company’s two-pronged growth strategy focuses on internal growth and acquisitions, which, to date, have been funded through operating cash flows. The company is well capitalized, has nominal long-term debt and is organized around two business segments, Interactive Management Group (including Enghouse Interactive and Enghouse Vidyo) and Asset Management Group (including Enghouse Networks and Enghouse Transportation & Public Safety).

This is an edited version of an article that was originally published for subscribers in the October 2020/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

The MoneyLetter, MPL Communications Inc.
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