Turkey of the week consultancy looks unstable – MoneyWeek

ButalthoughAxonisclearlyaqualitybusiness,Ibelieveitsshareshaverunaheadofthemselvesandnowlookvulnerable。

Letmeexplainwhy。

Firstly,analystsexpectsalesofSAP’sEnterpriseResourcePlanning(ERP)systemswillexpandby10%-12%ayearforthenextfewyears–muchlessthanthe30%ratepresentlyenjoyedbyAxon。

Additionally,muchoftheindustry’sgrowthisexpectedtocomenotfromAxon’straditionalclients,butfromsmallormid-sizedfirmsthathaven’tyetdeployedERPtools。

Secondly,Axonisdependentonafewlargeclients,withitstopfivecustomersaccountingfor54%offirst-halfrevenues。

Thisstrategyworkswellinfavourableconditions,butcanrapidlyunwindinharsherenvironments。

Forexample,contractsarecommonlyworthfrom£5m-£20minvalue;soitwouldonlytakethepostponementofacoupleofmajorassignmentsforAxon’sresultstobeadverselyaffected。

Next,around88%ofthegroup’sturnovercomesfromone-offconsultingorimplementationfees。

Again,whentheSAPmarketsoftens,thesenon-recurringrevenueswillbeatrisk。

Finally,Axonisexposedtoaweakeningdollar,with35%ofsalesderivedfromNorthAmerica。

Axoniscertainlymakinghaywhilethesunshines。

Butinvestorsmustrememberthatthisfickleindustrywashitheavilyafterthedotcomcrash。

Whencorporatesdecidetoslashdiscretionaryspend,ITbudgetsdonotremainunscathed。

Sowhatisthestockactuallyworth?

Well,forthistypeofcyclicalbusiness,withstrongcompetitionfromthelikesofIBM,EDSandCapGemini,IwouldvalueAxonona15times2007p/eratio。

That’sabout555ppershare,30%belowcurrentlevels。

Sowhyarethesharessoexpensive,tradinginsteadonheftymultiplesof21timesearningsand2。

3timessales?

Ireckonthisisbecauseinvestorsarenotyetcorrectlypricingintherisksfacingthebusiness。

Iwouldrecommendshareholderstakeprofitsandrecycletheproceedsintomoreattractiveareas。

Thechairmanandchiefexecutiveseemtoagree–theyhavesoldstockworth£13。

7mand£1。

6mrespectivelyoverthepastyearatpricesrangingfrom600pto770p。

Recommendation:SELLat825p

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