Recent economic data shows that business confidence is rising again, and that capital spending may be shaking off the chill it had in 2023. This bodes well for companies like Magic Software Enterprises (MGIC), which develops business process integration solutions and other IT applications and infrastructure products. 

After unexpected news in its latest earnings report that several U.S. customers had pulled back from projects with the Israeli company following the outbreak of the Middle East war, the stock has recovered nicely over the past few months. 

Economic conditions appear to be on the rise in anticipation of rate cuts this year, and that should fill the sails of MGIC as companies upgrade IT resources and digitization efforts continue to increase. Business digitization efforts are expected to grow through 2025 at a compound annual growth rate (CAGR) of 16.5%, with spending on digitization reaching 3.4 trillion by 2026.

And while there was a pull back in some business last quarter, MGIC noted that the impact of this on profitability was muted. CEO Guy Bernstein noted the business interruption “did not have a material impact on our profitability, and we expect our non-GAAP operating margin for the third quarter to be approximately 13.2%, which mimics such margin for the first half of 2023.”

And despite the recent climb in MGIC following the earnings release, the stock still has an attractive valuation at 13.9x earnings, 11.5x projected earnings, and only 6.6x free cash flow. The company has maintained gross margins of almost 26%, and currently has a solid 5.8% dividend yield. 

Magic Software is a B rated stock in our POWR Ratings, with a composite score of 94.5%. As noted above, it is especially strong in the Value component where it comes in above 95.67% of the stocks that we track in our database. 

Magic should continue to see demand for its products recover as the business cycle turns, and as companies reengage in capital spending, with many of them having process integration and digitization at the top of the list.

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MGIC shares were trading at $10.43 per share on Tuesday afternoon, down $0.28 (-2.61%). Year-to-date, MGIC has gained 7.64%, versus a 1.88% rise in the benchmark S&P 500 index during the same period.

Jay is a former professional market maker who cut his teeth trading on the floor of the CBOE. With more than 20 years of experience trading and investing, his focus is on making professional strategies accessible to everyone, which is exactly what does in his highly profitable POWR Income and POWR Stocks Under $10 investment advisory services.

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