The Investment Column: Focus on telecoms should hold Logica in good stead
LOGICA, the UK's fastest growing information technology group, has echoed comments from peers such as CMG and Sema that the millennium bug won't cause any major disruption to their business customers. This is meant to reassure investors about the sky-high price/earnings ratings accorded information technology firms.
As the sector's highest rated stock, Logica could suffer disproportionately should business customers freeze spending in the fourth quarter.
Chief Executive Martin Read is, however, optimistic that the 52 per cent rise in annual profits to pounds 63.4m can be repeated this year. That implies a prospective p/e of 50, a figure only slightly above the forecast earnings growth rate.
Logica has correctly focused on telecoms services and products, particularly in the fast growing markets for mobile messaging and new billing systems.
Telecoms accounted for nearly half of Logica's 39 per cent sales increase. Near-term, high telecoms company investment is unlikely to slow, so Logica has time to hold out for a recovery in the United States utilities sector and build up integrated products linking traditional SAP systems with the growing demand for e-commerce products.
This implies that analysts, who expect profits just above pounds 80m in the current year, will eventually raise forecasts. As that happens, the stock price, which despite yesterday's strong report fell 21p to 798p, is likely to make continued gains, a likelihood to be bolstered by Logica's eventual move into the FTSE 100.
The question is whether a better buying opportunity is likely to emerge before the market fully digests the earnings upside.
Given the likely negative impact on the Nasdaq index of a likely rise in US interest rates next month for the third time this year , value investors may be well advised to bide their time. Accumulate on weakness.
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