Buy into Craneware's healthy prospects

A key attraction for investors in Craneware is the visibility of its future revenue. At the end of February, the company had already secured $72.2m (£58m) revenue for the current financial year (a little more than the forecast in the accompanying table) and $200.8m for the three-year period to June 2022 – a high proportion of which is under contract. This is especially encouraging given the current market environment, as a number of companies struggle to keep their pipelines safe. 

Most software companies are also struggling to win new business. While Craneware will not be able to completely avoid such challenges, first-half new sales were up by more than 30 per cent. Nine-tenths of the rise was thanks to “expansion sales” to existing customers. This reflected the company's success at generating growth by cross-selling its products, which should cushion any slowdown in new customer wins. 

Less can be done to mitigate the pandemic’s impact on the delivery of the services, which will account for 16 per cent of 2020 revenue, based on forecasts from broker Berenberg. Although Craneware supports the US healthcare industry, it does not necessarily follow that it will see an uptick in demand, at least in the medium term, even as coronavirus-related spending grows. Most initiatives will likely be directed towards more immediate aid for patients and staff rather than efficiency drives. Still, existing demand should prove robust, as hospital efficiency remains crucial, and the gathering momentum in software licence sales might help to offset the impact of a shortfall in services.

Craneware's strength is not news to the market, refelcted in a price/forecast earnings ratio of 33. But the high multiple reflects the growth on offer. Revenue growth is likely to dip this year, but improve strongly in 2021. Long-term prospects are bolstered by the group’s newly launched cloud-based product suite ‘Trisus’ Enterprise Value Platform, which accounted for around a tenth of new sales in its first half. Management expects that this will increase the addressable market and profitability. Margins already look extremely healthy, with operating margins consistently in the high 20s over the past five years.