One UK share I’d buy in December and hold for 10 years

The stock price growth of some companies is gradual and compound, but some accelerate after reaching a tipping point. Sage (LSE: SGE) is a provider of integrated payroll and accounting systems, which appears to be at the hinge between a reliable UK stock and a profitable part of a portfolio.

In the current climate of double inflation, rising interest rates and a slowing global economy, many companies have posted low forecasts for the year ahead. Sage, however, has bucked the trend with optimism that this trepidatious situation will generate more operating profit and profit.

In my mind, this isn’t just tough talk to get bullish investors interested. However, this is a poor assessment of our strong financial fundamentals and successful transition to a new, more profitable business model.

Previously, Sage operated on a pay-as-you-go basis. The client pays for each agreed task or contract in advance. This means that clients can shop easily, and the business is sporadic. As a result, profits are not maximized and cash flow is not consistent, factors that make future planning difficult.

Now, however, Sage has moved to a subscription model. This has ended the barriers to expansion and profit in one fell swoop. Cash flow is steady and clients are loyal to the company. The bearish climate also helped Sage’s new model as high switching costs for many small to medium-sized companies that make clients generate high retention rates. It can now rely on a more solid base to expand its operations. Subscriptions also give them greater pricing power over what they charge for their services, a welcome hedge against inflation. It also ensured greater numbers, with revenue increasing by 12% this year.

This impressive transition was not set in a vacuum. It has crowned the good financial position of the company. The operating margin increased to 19.9% ​​in the financial year 2022, an achievement accelerated by strategic acquisitions supported by a high status quo. In difficult straits, many deals have to be done when the company encounters difficulties.

With money in the bank and net interest costs guaranteed 12 times by profits, Sage can cheaply own a small company or comfortably leverage more debt to eat a meaty entity. So, profits can come in leaps and bounds because of acquisitions.

From managing portfolios, I know that investing is not a science where data-oriented systems can pick winners without fail. It depends on the understanding of the company by human investors, “animal spirits” famous Keynes. Thus, in a bull market flooded with easy money, the fundamentals of a successful business are often overlooked instead of trendy, hyped industries like technology.

Now, where I believe even save wealth against inflation at a premium, that desirable quality is less likely to be neglected. Indeed, scarcity premiums can raise prices. So, my feeling is that Sage is a stock for next year on a balance sheet basis, but the new model gives it the potential to stay in the portfolio for the next decade.