Better value at Vocus

Vocus is better value but it's not quite a Buy.

We aren’t interested in collecting good businesses, we are interested in cheap stocks. That was our declaration earlier this year when we slapped a Sell on market darling Vocus Communications.

While the business was doing all the right things strategically, the valuation didn’t add up. The market appears to agree, with Vocus shares falling more than 20% over the past four months.

An optimistic view of earnings, outlined in Time to hang up on Vocus? suggests earnings per share of about 50 cents by 2018 if everything goes to plan. That makes today's price of just over $7 – a PER of just 14 times – rather attractive. That is, of course, if the best possible outcome occurs. While there is now upside with Vocus, there isn’t a margin of safety.

Acquisitions are hard to integrate, management make mistakes and business is unpredictable. For all those foibles we demand a lower price. We would consider buying around $6 but, for now, the price fall is enough to earn an upgrade to HOLD.

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