Pace set to accelerate

It's not hard to understand the market's qualms about Pace, and perhaps this is the best place to start. As well as broad fears about falling hardware spending due to a shift away from TV set-top boxes towards internet-connected devices, several other events have rattled investors in 2014. The abrupt resignation of finance director Roddy Murray during the summer caused unease, as have profit warnings from smaller set-top box suppliers and cautious comments from rival Arris. Another concern is the potential disruption that could be caused by consolidation in the US pay-TV market - such as Comcast's pending mega-merger with Time Warner - where Pace earns 62 per cent of its revenue. That said, hardware is still necessary and consolidation could alleviate pricing pressure. The group also lowered its full-year revenue guidance in 2014 to $2.6bn-$2.65bn (£1.67bn-£1.7bn), and requires a record second-half performance to hit that target.

But these uncertainties are masking Pace's attractions. The company remains a leading provider to the fast-growing global pay-TV market, which is forecast to grow compounded annual sales and subscriber numbers by 7 per cent and 8 per cent, respectively, between 2013 and 2018. The company has embraced the 'internet of things' by launching new products that are compatible with high-speed broadband, exposing it to a burgeoning consumer trend.

What's more, Pace's shares boast a free-cash-flow yield north of 10 per cent, while strong cash generation gives the company plenty of firepower to diversify further into high-growth areas through acquisitions. A prime example is Pace's purchase of Aurora a year ago. Aurora, which integrates video, data and voice applications into cable operators' networks, is expected to grow its full-year sales by 12 per cent to $243m and deliver double-digit earnings growth.

Pace is also a dab hand at rooting out savings. It slashed its underlying operating expenses by 5.8 per cent in 2013 and 6.1 per cent in the first half of 2014. This helped lift first-half margins and push up operating profit by 2.9 per cent to about $75m, despite weakness elsewhere in the business. There was a 17 per cent slump in sales of Pace's set-top boxes and media servers, but this reflected the fact that cable-TV providers are taking on more suppliers and not that they are shunning Pace's products. In fact, a mix of strong demand and product launches is expected to drive second-half revenue growth - a 60 per cent drop in sales of high-end routers or 'gateways' stemmed from customers delaying orders ahead of Pace's second-half product launches. So a bumper second half may indeed be on the cards and an update is likely in early January. Even if this falls short, there are plenty of reasons to like the shares for 2015.

Pace continues to make headway with US cable-TV companies. Comcast recently started deploying Pace's latest set-top box and digital video recorder, Armstrong chose Pace's hardware to power its TiVo software and it landed a multi-product deal with Charter Communications last year. The group also expanded internationally by signing first-half deals with Sky Italia and Brazil's Oi.

New products, contract wins and Aurora's contribution give Pace strong prospects. It reported rising third-quarter sales and profits and falling operating costs in a trading update covering the period from the beginning of July to 17 November 2014. And it expects full-year sales to rise by 6-7 per cent and adjusted cash profit to climb at least 21 per cent to $235m. But in spite of all this, Pace's shares trade at nine times next year's forecast earnings - a discount to peers such as Amino (16 times).