SDL drops 22% on H1 report

Shares in Software & IT Services company SDL dropped 22% to 497p, as of writing, on the back of its half-year report.

They reported total revenue up 5.5%, whilst adjusted earnings per share dropped 65%.

I see that their report made several references to revenue growth. I also see that their average ROCE has been 3.4% (source: Stockopedia), and they are on a PE of 22.1. The company is highly rated, yet is earns meager returns on capital. Taking these numbers at face value, it does not seem that the company is able to obtain sufficient return on capital, and that attempts at growth could actually be value-destroying.

I glanced through the report, and couldn’t see offhand why the market was so negative on the report. The bulletin boards didn’t offer any insights, either.

Stockopedia categorises the company as a High Flyer. Given the price action today,  the categorisation should be ignored. The combination of high PE rating and bad market reaction would cause me to sell the shares if I held them. Its low ROCE does not help, either.

I am predicting that the share price will be lower in 6 months time than it is now. Stay tuned, and we’ll see how well that prediction worked out.

497p