Share Watch: two employee-focused tech firms catch the eye

Two companies that have excelled by developing and incentivising staff are on Richard Beddard’s radar.

When investors think about the competitive advantages, assets or capabilities businesses have that will enable them to profit handsomely from their activities, they often think of things such as patents, unique products and services or popular brands. But while these can make companies special, so can people.

If a business is to flourish indefinitely, it will need to adapt, polish its brands, update its intellectual property, and invent new products and services. Success depends not on what a company has done, but on what it will do, hence my interest in employee-focused businesses such as dotdigital and Softcat.

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10 shares to deliver a £10,000 annual income in 2020

DotDigital

Dotdigital’s one product is the recently upgraded and rebadged Engagement Cloud, a digital marketing platform. Formerly dotmailer, Engagement Cloud’s expanded capabilities now enable customers to communicate with consumers through email, online chat software and social media platforms such as WhatsApp and Facebook Messenger.

Engagement Cloud allows companies to personalise and automate their digital marketing campaigns by determining which messages they send and when they send them, depending on the recipient’s previous interactions with a firm. Its customers are well-known UK charities and businesses, including ShareWatch favourite Jet2, the airline and package holiday company that sells most of its holidays online.

As a predominantly email platform, dotdigital has been a great success, and in the year to June 2019 it continued to grow strongly. Revenue increased by 15% and adjusted profit grew by 32%, although cash flow has been affected by investment in the software’s capabilities. The investment is necessary, not only to keep dotdigital relevant in a rapidly developing industry but to support growth aspirations abroad, particularly in Asia, where more people primarily use mobile phones than elsewhere.

Lots of digital marketing platforms can integrate with broader ecommerce systems, but dotdigital may have a competitive edge in the shape of its ‘dotfamily’ – that’s the nickname it gives its employees. Giving staff the opportunity to progress in a successful organisation is a powerful motivator, so dotdigital fills 30% of roles internally. The patriarch of dotfamily is dotdigital’s founder, interim chairman ‘Tink’ Taylor, a substantial shareholder and industry luminary.

Softcat

Softcat sells computer hardware and software to businesses and the public sector. Unlike dotdigital, it shifts other  companies’ products – all the bigname computer manufacturers and software providers, including Dell and Microsoft. Since these products are not particularly special, the service has to be if Softcat is to be competitive. Judging by its record, Softcat competes well. It boasts of 14 consecutive years of profit growth, and in the year to July 2019 it lifted revenue and adjusted profit by 24%.

Softcat’s biggest asset is its account managers, who help customers decide what to buy and advise them on implementation. Its strategy requires it to recruit and keep hold of good salespeople. The company, which has offices all over the UK and a handful overseas, will only open a new office when it has an employee to promote from within to run it. It only recruits salespeople at entry level, so they know their prospects will not be diminished by high-level appointments from outside the firm. In 2019, Softcat reduced its working week by two hours.

Softcat and dotdigital are quite different businesses but have much in common. They are technology-focused sales businesses, and probably the most important factor in their success is their account managers, whom they reward with share options, training and good career prospects. By keeping customer-facing employees happy, they keep customers happy, and happy customers mean happy shareholders.

But quality comes at a price. These businesses are highly regarded by investors and traders. A share price of 94p values dotdigital at 27 times adjusted profit and a share price of £11.26 values Softcat at 32 times adjusted profit. In my scoring system, high valuations count against companies, which is why they languish outside my top five shares for now.

Share Sleuth’s favourite five

Score Name Description Interactive Investor link
8.2 XP Power Manufactures power adapters for industrial and healthcare equipment http://bit.ly/swXPP2019
7.7 PZ Cussons Manufactures personal care and beauty brands, in the main ttps://bit.ly/swPZC2019
7.5 Goodwin Casts and machines steel. Processes minerals for casting jewellery and tyres http://bit.ly/swGDWN2019
7.3 Victrex Manufactures PEEK, a tough, light and easy-to-manipulate polymer http://bit.ly/swVCT2019
7.1 Anpario Manufactures natural animal feed additives http://bit.ly/swANP2019

Note: Shares are scored out of 10, according to five criteria: profitability, risks, strategy, fairness and value. Howden Joinery and Solid State have dropped out of the top five because of their higher share prices. They have been replaced by Goodwin and Anpario.

 

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