Update: Magic Software Earnings - Sales Up 17%, Confirms Forward Guidance

| About: Magic Software (MGIC)


Revenues continue rising, 17% Y/Y. Margins decreased slightly and EPS was flat Y/Y due to the 11% share dilution from secondary offering. Allstate temporarily hurt by AT&T Direct TV merger.

My thesis worked well on continued growth. In six months, the stock returned over 60% as it hit my most optimistic target almost precisely. It later retreated after secondary offering.

I confirm my long thesis and my target price. I see MGIC at $9.89 again within a year as growth continues, offering a ~35% upside.

Magic Software Enterprises, Ltd. (NASDAQ:MGIC) reported strong Q2 2014 results (SEC filing, press release, earnings call). The company's revenue reached $40.6M, up 17% Y/Y. Non-GAAP gross profit was 16.7M, up 12%. Non-GAAP gross margin decreased to 41.2% on the addition of the lower-margin acquired services. GAAP net income was $3.9M, or $0.09 per diluted share, up 11% Y/Y. Based on 11% higher share count due to the secondary offering the income per share was unchanged Y/Y. Cash reserves were higher, at $92.8M. Operating cash flow for the first half of 2014 was approximately $12M. The company's policy to return up to 50% of its net income in the form of dividend continues. The company declared a $0.095 dividend for the first half of 2014. This is lower sequentially than the $0.12 declared for the previous half year but higher Y/Y for the same period of the first half of 2013 when dividend was $0.09 per share. Nonetheless, there goes my assumption that MGIC was turning into a stable dividend grower. However, I don't mind because the yield is still high enough and the total return helped by EPS growth and stock price appreciation is more than solid.

MGIC has been profitable since 2006 and has been consistently increasing its operating income Y/Y. The company reiterated its 2014 full year guidance for the revenue to be between $161M and $165M. Regarding the progress with the Allstates Technical Services acquisition, the company knew beforehand that some projects would not continue but suffered a bit more from the slow-down of the telecom sector as AT&T basically stopped all projects because of their direct TV merger. However, once the AT&T is back in the market as expected, MGIC should benefit again.

My original thesis worked well, with the company increasing its growth rate which resulted in a higher stock price. At the peak, the stock gained more than 60% in six months and hit almost precisely my highest target of $9.89 that implied a 20% annual EPS growth rate. Since then, the stock receded back but is still up roughly 18% since my call. The current dip offers a good buying opportunity. I reiterate my long thesis and see a target price of ~$9.89 again within a year if growth accelerates, perhaps helped by an acquisition. If the growth is slower, the stock still has at least a 10% to 20% upside from here within a year.

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