Micro Focus International (LON:MCRO) has been a superstar stock for some time now with the share price locked in a stellar uptrend since mid 2011.
On Wednesday, management delivered another bullish update and prices gapped higher at the open, closing up 4.2% on the day.
The 75% increase in interim dividend and 15% year-on-year growth in pre-tax profit invariably took the headlines. However the impact of the acquisition of Serena Software and its subsidiaries means that a deeper look is required.
Key H1 Takeaway’s
Importantly, management reported that the high-profile takeover of Hewlett Packard's software arm (NYSE:HPE) remains on track to complete in Q3, 2017.
Looking at the numbers on a constant currency basis -- and adjusting for M&A -- does not spoil the party. On that basis, first-half revenue grew 1.2%, adjusted EBITDA 7.8% and adjusted EBITDA margins increased from 44.5% to 46.8%.
Combined with the positive impact of the Serena acquisition, it’s no wonder that prices rallied as they did. See below for Micro Focus’ 9 Month Daily Candle Price Chart:
Bottom Line?
Taking a step back, you would be forgiven for thinking that the bullish price momentum following the HP takeover announcement had fizzled.
However, comparing the performance of Micro Focus to the FTSE 350 Software & Computer Services index over this period shows a different picture. Through mid-November, Micro Focus performed in-line with its peer group, yet since mid-November, MCRO has shown clear relative strength.
That said, we weren't surprised to see the company deliver a bullish H1 update on Wednesday.
What's Next?
Looking at the price chart we can see that Wednesday’s gap higher was due to an intense period of price compression. With prices coiling in a tight trading range for the four days prior to this decisive directional move, we were far from surprised.
As prices held their gap on Thursday, we are now seeing short- and long-term momentum align -- a prerequisite for swing traders.
However, despite the scope for prices to rally higher in the near term, there are two clear resistance levels overhead. The October swing-high of 2,267p is the first and the multi-year high of 2,400p is the next.
Given Micro Focus’ bullish fundamental backdrop, the stock remains firmly fixed on our watch list.