Today I want to look at two potential buys.

Packing a profit

The online retail market is growing fast. But which companies take a slice of profit out of every single internet sale? Payment processors and packaging firms.

In my view, the packaging sector in particular offers some attractive opportunities at the moment. Alongside the growing demand from internet retailers, supermarkets and industrial firms also require increasingly sophisticated packaging. This minimises waste and labour-intensive unpacking operations.

The top pick in this sector?

FTSE 100 group Mondi (LSE: MNDI) has fallen by more than 20% over the last three months, but I can’t see any reason to turn bearish on this business.

Half-year results in August showed that pre-tax profit rose by 6% to €490m during the six months to 30 June. Cash generation has also improved and an update in October confirmed that the group continues to benefit from “stable pricing” in the cardboard market.

City analysts have upgraded their earnings forecasts for the firm several times over the last year. This suggests that Mondi is performing better than expected. Despite this, the shares now trade on just 10 times forecast earnings and offer a 3.8% dividend yield. I rate the stock as a buy at this level.

An under-the-radar buy?

Another company that’s consistently performed better than expected over the last year is outsourcing specialist Serco Group (LSE: SRP). Back in September, the company upgraded its guidance for 2018, saying that a number of one-off items would boost profits.

An update on Thursday confirmed this outlook and painted a brighter picture for 2019. The acquisition of selected healthcare facilities contracts from failed firm Carillion should add to the group’s profits next year and allow the company to generate further profit growth in 2019.

At the time of writing, Serco’s share price was up by 9% at 98p as investors cheered the progress being made by turnaround boss Rupert Soames.

Long-term opportunity

I have to admit that outsourcing — which tends to have low profit margins — is not my favourite sector to invest in. But I do have a high regard for Mr Soames and the progress he has made so far.

Unlike some rivals, Serco’s debt is firmly under control. Year-end net debt is expected to be “around £200m”, giving the firm a leverage multiple of just 1.2-1.3 times EBITDA (earnings before interest, tax, depreciation and amortisation).

Mr Soames has managed to ditch some loss-making and troublesome contracts, in order to focus on more profitable operations. Although it’s early days, the firm’s underlying operating margin rose to 2.8% during the first half of this year, compared to 2.3% for the same period last year.

With a 2018 forecast price/earnings ratio of 19, Serco shares don’t look obviously cheap. There’s also no dividend at the moment. But I think that the hardest part of this turnaround is now over. Profits could now start to rise steadily. In my view, this could be a profitable share to tuck away for the long haul.

The post Have £3k to invest? One FTSE 100 dividend stock I’d buy for the next 10 years appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Doing this could mean that you’ll enjoy years of rising earnings and dividends, giving you a market-beating return on your original investment.

Today I want to look at two stocks that could fit the bill.

Slow progress?

Outsourcing and construction firm Interserve (LSE: IRV) announced the sale of its scaffolding business this morning, for up to £4.6m. The news follows the group’s recent half-year results. These showed that headline operating profit fell by 29% to £40.1m during the six months to 30 June, compared with the same period last year.

Management tried to put a positive spin on these figures by pointing out that they were better than the second half of 2017. That’s true. But this doesn’t disguise the fact that Interserve ended the period with increased net debt of £614.3m. This is more than six times trailing earnings before interest, tax, depreciation and amortisation (EBITDA).

The company’s lenders won’t allow it to pay a dividend until the group’s net debt-to-EBITDA ratio falls below 2.5x. In my view this is unlikely to happen until the company holds a rights issue to raise fresh cash from shareholders.

What comes next?

Analysts’ forecasts suggest the City holds a similar view. Although adjusted earnings are expected to triple to 19.3p per share next year, the current share price of 56p puts the stock on a 2019 price/earnings ratio of just 3.

In my opinion this indicates that the market doesn’t expect Interserve to deliver a sustainable recovery without raising fresh cash and diluting shareholders. I agree. I believe these shares are simply too risky for equity investors at the moment. I’d stay well away.

A more profitable choice

The integration of the outsourcing firms into the UK public sector shows little sign of slowing down. If you would like exposure to this type of business, one stock I would consider is Serco Group (LSE: SRP).

Serco shares received a boost last week, when the firm said that profits for 2018 are now expected to be ahead of previous guidance. Revenue of £2.8bn is expected to generate an underlying trading profit of £90m-£95m, up by about 30% on last year’s figure of £70m.

Another attraction is that chief executive Rupert Soames has already bitten the bullet and raised cash to reduce debt. As a result, his firm’s balance sheet now looks quite reasonable. Net debt should be less than 1.5x EBITDA this year, which seems comfortable to me.

A long-term buy?

Serco stock currently trades on a forecast P/E of 25, falling to a P/E of 21 for 2019. This may seem pricey, but the group’s profits are recovering from historically low levels.

Mr Soames is taking care to rebuild this business with solid foundations and sustainable profit margins. Dividend payments are expected to restart next year and I believe several more years of strong profit growth should be expected.

In my opinion, Serco shares could be an excellent buy-and-hold pick at current levels.

The post One FTSE 250 stock I’d buy to beat the State Pension in October (and one I’d avoid) appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Following the Footsie’s recent bull run, finding such stocks could prove to be even more challenging, with valuations being close to record levels. However, here are two stocks that could offer significant total return potential in the long run.

Improving performance

Reporting on Thursday was support services company Serco (LSE: SRP). The performance of the business in 2017 was relatively impressive, with it able to deliver profitability at the top end of previous expectations. Although sales and profitability were lower versus the prior year, the overall performance of the business in a difficult market was upbeat. This allowed it to reduce net debt to lower levels than had been expected, which could help to improve the sustainability of the business.

The strategy employed by Serco appears to be having a positive impact on its performance. Also providing it with growth potential is its international focus, with the performance of the UK public outsourcing industry coming under pressure during the year. Despite this, the company continues to see opportunities for growth in domestic and international markets in the long run.

Looking ahead, the stock is forecast to post a fall in earnings of 1% this year. However, it is expected to follow this up with growth of 42% next year. The company’s price-to-earnings growth (PEG) ratio of 0.4 indicates that investors have not fully priced in its growth potential. And with dividends due to rise by 150% next year after commencing again this year, the income potential for the stock also appears to be enticing.

Successful turnaround

Also expected to deliver a strong recovery over the next couple of years is fellow support services company G4S (LSE: GFS). It also experienced challenges in recent years, with legacy issues contributing to a fall in profitability. However, under its current strategy it appears to be delivering on its potential, with it returning to positive earnings growth in 2016.

The stock is expected to report a rise in its bottom line of 9% in both of the next two financial years. This puts it on a PEG ratio of just 1.3, which suggests that it offers a wide margin of safety. Certainly, a margin of safety of some sort is understandable, given the difficulties experienced in the UK outsourcing sector in recent months. But such a low valuation at a time when the investment outlook for the wider index is positive could suggest that there is upside potential on offer.

Additionally, G4S has a dividend yield of 3.9% from a payout that is covered almost twice by profit. As such, it could become an even more attractive income play – especially with its financial outlook being relatively positive.

The post 2 top value Footsie stocks I’d buy right now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Given the opportunity cost of remaining invested in an underperforming stock for too long, I’m of the opinion that loyal holders may be better off moving on. Here’s why. 

Outlook unchanged

Today’s pre-close trading update for the first half of the year has been met with a distinct whiff of apathy by the market and it’s not hard to see why.

The outsourcing behemoth now expects revenue to come in at £1.5bn — 8% down when compared to the same period in 2016. At approximately £35m, underlying profit is predicted to be far less than the £51m reported by the company in H1 2016 due to the latter benefitting from what have been labeled as “non-recurring trading items“.

Looking forward, Serco’s guidance for full-year revenue and profit remains the same, at £3.1bn and £65m-£70m respectively. However, the company also stated that the sensitivity of the latter to even small changes in the former (along with costs and currency movements) means that the outcomes for profits “remain wider” than those stated, “both to the upside and the downside“. This lack of clarity is hardly encouraging for investors.

In addition to this, CEO Rupert Soames also stated that a number of the markets in which Serco operates had become “markedly more unpredictable” over the last six months and that management was remaining “sensibly cautious” as a result. That’s despite the company now having what he regards as a “very strong” order intake (around £4bn of business secured over the 12 months to the end of June).

With many obstacles still ahead, horrific free cashflow, no dividend, and levels of debt remaining pretty much the same (at between £150m and £200m), I think there are far better destinations for investors’ capital right now.

Bouncing back

To make things even more painful for Serco, shares in industry peer G4S (LSE: G4S) have been on a roll over the last 12 months. Contract wins with companies including Lloyds and Walmart have seen investors return to the stock in their droves, resulting in a share price climb of 76% and re-admittance to the market’s top tier.

In its most recent update, CEO Ashley Almanza reflected on what had been a “strong start” to 2017 for the company, with last year’s trading momentum persisting into Q1. Revenues from continuing business were almost 9% higher than those seen in the first three months of 2016 with double-digit organic growth being seen in developed markets. A promising pipeline of work now leads management to predict average revenue growth of 4%-6% per annum.

At the time of writing, shares in G4S trade on 18 times forecast earnings with analysts predicting EPS growth of 29% for the current year, falling to 9% in 2018. That doesn’t scream value but it’s a significantly lower valuation than that attached to shares in Serco on a forecast price-to-earnings (P/E) ratio of 43.   

Even with its considerable pensions deficit — which could put pressure on the dividend — G4S looks an odds-on winner when compared to the struggling mid-cap.

The post One turnaround stock I’d buy and one I’d sell appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Cairn Energy has tracked lower as hopes of the oil market returning to balance have shrunk. While Brent may have remained stable above the $50 per barrel marker since the start of the year — indeed, the black liquid cost just touched two-month peaks above $56 — data showing workers in the US shale sector stetadily getting back to work has still weighed on the oil sector.

Latest Baker Hughes numbers on Friday showed the US rig count rising for the 13th week in a row. A total of 683 working units now represents the highest since the spring of 2015, and threatens to keep Stateside inventories close to bursting point.

Meanwhile, the EIA said this week that it expects US output to rise by 124,000 barrels per day in May as producers become more economically comfortable operating at current crude prices. If correct, this would represent the biggest monthly jump for two years.

Too much risk

With output also booming from other nations like Brazil and Canada, the impact of swingeing OPEC reductions are proving less-than-effective, to put it mildly. Rather, last November’s supply accord has provided the necessary support for producers elsewhere to fill the output gap.

And this threatens to put the long-term earnings prospects of Cairn Energy and its peers under considerable pressure.

On the one hand the Scottish driller could be considered a more secure bet than many of its peers. As well as sitting on a $335m cash pile as of December, Cairn Energy has $400m worth of debt facilities yet to be tapped. And the company’s gigantic Kraken and Catcher assets in the North Sea remain on track to produce first oil in 2017.

Having said that, I still consider Cairn Energy to be a gamble too far. Not only could massive oversupply in the crude market see the company’s long-term crude price assumption of $70 per barrel miss the target, but the unpredictable nature of oil exploration and production adds another layer of risk for shareholders.

And I reckon further disappointing supply-side news could see Cairn Energy’s share value continue to drop.

Bashed by Brexit?

Serco (LSE: SRP) has suffered no shortage of stock price pain either, the support services provider sinking 22% since releasing worrying full-year financials in late February.

Serco announced that revenues from continuing operations fell 5% last year to £3bn, a result that forced underlying trading profit 14% lower, to £82.1m.

And while the business maintained its full-year sales guidance for 2017, Serco noted that “we think that Brexit offers both risks and opportunities,” adding that “the picture is unlikely to become clear in the short term.”

Business investment in the UK is likely to remain patchy for some time yet as Brexit negotiations continue, a position that could significantly hamper earnings growth at Serco.  And I do not believe these troubles are currently baked into the share price given its massive forward P/E ratio of 43.1 times.

I reckon further weakness could be just around the corner.

The post Is it finally time to buy these beaten-down FTSE 250 stocks? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Profit warning

It seems not. The Dorset-based group has since issued two further profit warnings and decided to scrap the final dividend altogether. Things were already looking grim for the aerospace and defence group last year, but now things are even worse. Last month the company announced plans for another rights issue after it sank to a massive £848m loss for 2016.

This will be Cobham’s second £500m rights issue in less than a year, as the struggling business looks to pay down its massive debts, after management conceded that the group’s balance sheet is clearly not strong enough. Full-year results for 2016 revealed a slight dip in orders to £2.08bn, down from £2.15bn in 2015, with revenue 6% lower at £1.94bn, compared to £2.07bn a year earlier. Pre-tax profits collapsed by a massive 38% to £175.2m from £280.4m the previous year.

Half price bargain?

Now trading at 139p, the group’s share price has staged something of a recovery of late as investors feel relieved the company has avoided a sixth profit warning in 15 months. Less of a surprise is that management has stated that it will not be recommending a dividend for 2017.

Cobham has shed more than half its value since its share price peaked at 293p in 2015, and bargain hunters may be wondering whether this is the right time to pounce on the severely wounded business. The picture remains bleak, with our pals over in the City suggesting that earnings will shrink by a fifth by the end of the year, leaving the shares trading on a very demanding 20 times earnings for 2017.

I’d be inclined to stay away until the group’s new management has had some time to sort out the mess from the previous era.

Swing to profit

Another mid-cap firm trading at less than £2 per share is outsourcing group Serco (LSE: SRP). The last few years have been very challenging for the Hampshire-based public services specialist with numerous contract problems and high-profile scandals straining relations with the UK government, from which it derives half its income.

As with fellow mid-cap firm Cobham, Serco has issued numerous profit warnings in recent years, resulting in a monumental share price collapse from 553p to 114p in less than four years. The FTSE 250 firm finally managed to swing back into profit in 2016, after two years in the red, but saw its shares plunge after reporting a drop in trading profit with revenues continuing to decline.

Underlying earnings are forecast to shrink by 59% this year, and the shares look extremely overvalued at 43 times 2017 earnings. I can see a market correction looming.

The post 2 FTSE 250 bargains for under £2 appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Major change

Capita’s current strategy includes a plan to streamline the business and make it more efficient. For example, it will dispose of two of its businesses, Specialist Recruitment and Asset Services, while it will seek to create a simpler and lower-cost business model. While this could improve the company’s performance, the reality is that a new CEO is likely to go much further with changes in the company’s strategy.

A key reason for this is that a new person at the helm will have greater scope to make changes. They will not be bound by any previous decisions and will be able to consider the future of the business from an outside perspective. This could benefit Capita, since it seems to have lost its focus in recent years and has become somewhat bloated. Major change may mean great uncertainty, but it could also lead to rising profitability in the long run.

Growth potential

Capita is forecast to return to profitable growth in 2018. However, its bottom line is due to flatline in 2017 before rising by just 3% next year. In the meantime though, its shares could see their rating increase as a new strategy is announced and begins to take hold. In other words, low earnings growth in the next two years may not hold back Capita’s share price if it is able to prove to investors that it has the right ideas on how to boost its earnings.

The company’s shares currently trade on a price-to-earnings (P/E) ratio of just 9.1. This is lower than their four-year historic average P/E ratio of 16.4. If the company’s P/E ratio reverted to its mean, it could equate to a share price gain of well in excess of 70% within three years. This includes a margin of safety in case earnings forecasts are downgraded.

Sector inspiration

Of course, Capita is not the only support services company to experience a difficult period. Sector peer Serco (LSE: SRP) is around halfway through an ambitious plan to improve its financial performance. Its recent results showed that while it is not yet back to full health, its performance is gradually starting to show green shoots of recovery. Therefore, Capita could follow a similar path over the next few years.

With Serco trading on a P/E ratio of 41.6, it may appear overvalued at the present time. However, its bottom line is expected to increase by 45% next year, which puts it on a price-to-earnings growth (PEG) ratio of just one. Therefore, it appears to be a sound buy, although Capita’s lower rating could make it the stronger performer over the medium term.

The post Recovery stock Capita plc could gain 70%+ within 3 years appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens owns shares of Capita Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

A difficult year

The company in question is outsourcing specialist Serco (LSE: SRP). Its performance in 2016 was disappointing, with revenue declining by 13%. This included an 11% organic decline from net contract attrition and an 8% reduction from disposals, partially offset by a 6% currency benefit. Without the impact of positive currency translation, its performance would therefore have been even worse.

As expected given falling sales, underlying trading profit moved 15% lower. While this was disappointing, Serco made progress in improving its business during the year. It is making headway with its five-year plan, and its performance in 2016 was in line with the guidance the company provided at the time of its first-half results. It has been able to reduce operating costs by £450m, with the value of its pipeline of new opportunities up 30%.

Future prospects

Serco stated in its update that it is around half-way through its transformation plan. It expects 2017 performance to be in line with previous expectations, with the market anticipating a decline in earnings of 53% in the current year. The process of restructuring the business will be a painful one which could cause further volatility in the company’s share price in the short run. As such, today’s 18% decline in Serco’s valuation may not be its lowest ebb.

However, in the long run Serco appears to have significant growth potential. It is forecast to record a rise in its bottom line of 66% next year, which puts its shares on a price-to-earnings growth (PEG) ratio of just 0.5. This indicates that it offers a wide margin of safety, which may equate to high capital growth in the long run. Certainly, there is likely to be some disappointment ahead as the size and scale of its turnaround is relatively large, but in the long run it could prove to be a strong performer.

Sector inspiration

Within the support services sector in which Serco operates, G4S (LSE: GFS) has been able to deliver a successful turnaround. Arguably, its performance was never as challenging as that of its sector peer, but G4S nevertheless endured a tough period. The scandal involving prison tags hurt the company’s reputation and may have led to a difficult period. However, it is now performing relatively well and is due to report a rise in its earnings of 16% this year, followed by 9% next year.

Clearly, G4S is a lower-risk option than Serco. Its business is performing well and it does not require a transformation programme. However, its PEG ratio of 1.4 also means there may be less upside than for its struggling sector peer. While both stocks could be worth buying, Serco seems to have the more enticing risk/reward ratio at the present time.

The post I’m bullish on this growth stock despite profit warning sending shares 18% lower appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The group plunged to a £100.4m loss during the first half of the year, after deciding to sell or wind down its home carer business, due to falling volumes and increasing price pressure.

Mitie shares have since recovered some of their early losses, and are now down by about 10%. But the outlook remains uncertain for the group, which has lost more than 40% of its market cap this year.

In this article I’ll ask whether today’s news could mark the low point for Mitie. Is this stock a turnaround buy, or is there better value elsewhere in the outsourcing sector?

Troubling numbers

Mitie employs a high number of low-paid workers in sectors such as cleaning and security. The national living wage has caused costs to rise for the firm’s clients, some of which have cut spending as a result.

This has translated into flat revenues and lower profits for Mitie. The group’s adjusted operating profit fell by 39.1% to £35.4m during the first half, pushing down Mitie’s adjusted operating margin from 5.2% to 3.2%.

Adjusted earnings per share fell by 44% to 6.2p, and Mitie confirmed that full-year earnings are now expected to be below previous forecasts. The interim dividend has been cut by 25% to 4p. This suggests to me that the forecast full-year payout of 11.8p is unlikely to be met.

Has Mitie bottomed out?

Ruby McGregor-Smith, Mitie’s chief executive, is leaving the group in December. She’ll be replaced by Phil Bentley, who was previously in charge at Cable & Wireless and British Gas.

Mitie’s management expects second-half results to be better, as a result of cost-saving measures and revenue from certain new contracts. In my view, this isn’t a good enough reason to buy. I suspect further problems may come to light after Mr Bentley takes charge. I believe it’s too soon to consider Mitie as a recovery play.

Don’t lose hope

Mitie shareholders shouldn’t lose hope. The recovery of Serco Group plc (LSE: SRP), under replacement chief executive Rupert Soames, suggests that Mitie’s outsourcing business model remains valid.

Mr Soames has managed to dispose of or terminate many of the group’s lossmaking contracts, in order to focus on more profitable work. Serco’s net debt has fallen by more than half over the last year. The group’s underlying first-half earnings rose from 1.57p per share to 3.7p this year.

Although Mr Soames has warned that further gains may take longer to deliver, he does appear to have stabilised Serco. The firm’s shares have recovered some of their previous losses, and are up by 37% so far this year.

Serco currently trades on a 2016 forecast P/E of 30, and offers no dividend. This may seem pricey, but at 136p, the stock is cheap relative to historical earnings. For investors with a long-term view, Serco may be worth a closer look.

The post Is there hope for Mitie Group plc after today’s results? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

On the road to recovery?

In its interim statement the Hook-based firm said it was on the road to recovery after a strong set of results for the first half of its financial year thanks to cost savings and the fall in the value of sterling. Serco’s share price has been recovering too, gaining 44% since April this year and partly reversing a slide that began three years ago. So is Serco turning a corner and reversing its fortunes, or is this just a dead cat bounce? Unfortunately, I believe it’s the latter.

Firstly, the strong share price rally this year has come from a very low base, and the shares are still worth less than a third of their value of just three years ago. Secondly, broker consensus estimates suggest a rather gloomy outlook. The City is expecting underlying profits to fall by 16% in the current year to the end of December, with profits shrinking by a further 38% next year, by which time the shares will be trading at an astronomical 47 times forecast earnings. I expect gravity and common sense will kick in, and the shares will fall back to earth some time very soon.

Growth, but at a price

In stark contrast to Serco, British-based industrial engineering firm Spirax-Sarco (LSE: SPX) has enjoyed copious amounts of prosperity over the years. The mid-cap firm that specialises in steam management systems and peristaltic pumps has enjoyed rapid expansion and now operates 77 units in 43 countries around the world. Consistent revenue and earnings growth has attracted the attention of investors and has led to a relentless share price climb from under £3 at the start of the millennium to current levels around £46. That’s a 15-bagger!

The Cheltenham-based mid-cap firm recently reported good growth in pre-tax profits for the first half of 2016, and with it announced the acquisition of the assets of Brazilian valve maker Hiter Indústria e Comércio de Controles Termo-Hidráulicos from US-listed Pentair. Spirax expects to benefit from strong cost synergies between Hiter that makes steam and process fluid applications, and its own existing Brazilian unit.

Analysts’ projections suggest Spirax’s revenues will rise to £741m this year, together with a 15% rise in underlying earnings. But after a 57% share price rise over the last 12 months Spirax looks pricey at 28 times forecast earnings. I fear a strong market correction could be on the cards by the end of the year.

The post Beware! These FTSE 250 shares could be heading for a fall… appeared first on The Twelfth Magpie.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.