Iress's price tumble

We said we'd need a much lower price to get interested in Iress in our last review, and we've got one. But instead of upgrading, we're reducing our buy price and holding.

Iress' two domestic businesses – financial markets and wealth management – are dominant cash gushers. But when a business already dominates a mature industry, it leaves little room for growth, and that's the pickle Iress finds itself in.

Management has resorted to buying other businesses – often overseas – as a means of growth. But this hasn't been a winning formula for Iress shareholders, as the chart shows. A good business is no longer good when it lacks the potential to reinvest at high rates but does so anyway.

Yet every business has a price, including the slow growers. Finding Iress's requires some tinkering due to overstated amortisation, which has arisen as some of the value of prior acquisitions has been attributed to software and customer relationships, two amortising assets (as opposed to goodwill which is non-amortising). Over five years, Iress has recognised $115m of amortisation, whereas its actual investment into software and plant and equipment is $51m lower.

After accounting for this, Iress's free cash flow yield is around 5%, which offers the prospect of a respectable return assuming management delivers on its 3–7% growth forecast. But if something goes awry the current price offers little margin of safety.

To factor in a slower growth outlook, we're reducing our buy price to $8 and sticking with HOLD.