Why I’d Sell Serco Group plc But Buy Barclays PLC & Berkeley Group Holdings PLC

While Barclays PLC (LON: BARC) and Berkeley Group Holdings PLC (LON: BKG) have huge potential, Serco Group plc (LON: SRP) appears to be set to struggle

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today’s first-half results from support services group Serco (LSE: SRP) may be slightly better than expectations, but they show a company that has a long, hard road to recovery ahead of it. And, while its shares have risen by as much as 2% today, they are still down 21% since the turn of the year, leaving most of its investors deep in the red.

In the first half of the current year, Serco saw its pretax profit fall from £10.9m in the first half of 2014 to a loss of £76.2m. The reason for such a major decline in profitability is £117.4m in exceptional costs, with Serco being hit by refinancing costs as well as considerable asset impairments. In addition, revenue declined from just over £2bn in the comparable period of 2014 to less than £1.8bn in the first half of 2015, as Serco’s contracts to run the Docklands Light Railway in London as well as the National Physical Laboratory came to an end. As a result of its challenging half year, Serco will pay no interim dividend.

Looking ahead, Serco looks set to be on the cusp of a real fight to win back its reputation, customers and also investors after a hugely challenging period for the company. This, though, will take time and, while Serco is expected to post a trading profit for the full year of £90m, this excludes the impact of writedowns and, as a result, a loss for the full year remains a distinct possibility. While the company’s management team is clearly doing a good job in turning the company’s fortunes around and appears to be taking prudent steps to do so, there appear to be better opportunities available within the FTSE 350, since things could get worse for Serco before they get better.

One such opportunity is Barclays (LSE: BARC). Unlike Serco, it is hugely profitable and is forecast to increase its bottom line at a rapid rate over the next couple of years. And, despite such strong growth prospects, Barclays continues to offer excellent value for money, with it trading on a price to earnings growth (PEG) ratio of just 0.4, it appears to offer huge upside potential.

Furthermore, Barclays has the potential to become a superb income play, too. That’s because it is targeting a payout ratio of around 45% over the medium term. With earnings per share set to reach over 28p next year, this means that Barclays could be set to pay out at least 12.6p per share in dividends per year over the medium term. At its current share price, this equates to a yield of 4.5%, which would undoubtedly help to improve investor sentiment and push the bank’s share price higher.

Meanwhile, the house building sector also has huge potential and prime property group, and Berkeley (LSE: BKG), remains a top notch investment. Certainly, its shares have risen significantly in recent months, with them being up 42% since the turn of the year. However, they still trade on a very appealing valuation with, for example, Berkeley currently having a PEG ratio of just 0.2. And, with their yield still being 4.5% despite such a strong share price rise, they seem to offer a potent mix of growth, income and value potential.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Barclays and Berkeley Group Holdings. The Motley Fool UK has recommended Barclays and Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s how I’d target £496k in FTSE 100 shares and £19k of passive income in a Stocks & Shares ISA

I invest as much surplus cash as I can at the end of the month in my Stocks and Shares…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Is Rolls-Royce’s share price an irresistible bargain?

Is Rolls-Royce's share price the FTSE 100's greatest bargain today? Royston Wild explains why he would -- and wouldn't --…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is the Vodafone share price a wonderful bargain or a horrible value trap?

As the Vodafone share price continues to fall, is it now a stock to buy with a view to a…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

I’d buy 95,239 shares of this banking stock to generate £200 of monthly passive income

Muhammad Cheema takes a look at how Lloyds shares, with a dividend yield of 5.9%, can generate a healthy monthly…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Can FY results give the Antofagasta share price a long-term boost?

The Antofagasta share price has had a good five years. Now the company says it's set to enter a new…

Read more »

Person holding magnifying glass over important document, reading the small print
Dividend Shares

Can I make sustainable passive income from share buybacks?

Jon Smith notes the rise in share buybacks from FTSE 100 companies, but flags up why they aren't great for…

Read more »

Front view of a mixed-race couple walking past a shop window and looking in.
Investing Articles

After the Currys share price rockets, here are more potential UK takeover targets!

The Currys share price has surged 39% higher in response to news of a takeover bid. Which UK stocks could…

Read more »

Investing Articles

Down 25%, where will the British American Tobacco share price go next?

The British American Tobacco share price has taken a hit. But this Fool isn't deterred. He think's now could be…

Read more »