Outsourcing giant Mitie Group (LSE: MTE) shocked us all back in September when it issued a surprise profit warning on the back of deteriorating market conditions.
Shares in the business slumped to their cheapest since the spring of 2009 in the days following the release, and the news also prompted the resignation of long-time chief executive Ruby McGregor-Smith.
Mitie Group advised that “we continue to experience the effects of significant economic pressures,” the firm noting “lower UK growth rates, changes to labour legislation and further public sector budget constraints, and uncertainty both pre and post the EU referendum.”
As a consequence Mitie advised that “in the first half we expect revenue to be modestly lower and operating profit to be very significantly lower.”
The support services provider’s report for the period spanning April-September is scheduled for release on 21 November. And it’s quite possible that Mitie will report a further deterioration in trading conditions as uncertainty following June’s referendum delays investment decisions by British businesses.
The City expects Mitie to endure a 19% earnings collapse in the year to March 2017, and I believe the complexity of the UK’s Brexit negotiations could hinder any earnings recovery, in the near term at least.
As such, I reckon investors should give the firm short shrift, even though the firm deals on a modest forward P/E ratio of 10.4 times. I reckon further downgrades to bottom-line forecasts are a very real possibility in the weeks and months ahead.
Global goliath
Conversely, I reckon investors should consider snapping up Homeserve (LSE: HSV) prior to the firm’s half-year report (currently slated for 22 November).
The emergency call-out play remains anchored near this month’s peaks of 622p per share, the highest since the five-for-one share split back in 2010. And I reckon next week’s release could prompt a surge to new recent tops.
Homeserve announced in July that “the group is trading in line with our expectations and we expect to deliver good growth in the year ending 31 March 2017.” Huge investment in marketing is helping to build the firm’s customer base, but this is only part of the story as Homeserve has a knack of retaining the bulk of its clients — indeed, retention rates in the US and UK clocked in north of 80% in the last fiscal year.
Meanwhile, the acquisition of United Service Partners (or USP) in July has bolstered the repairs giant’s position in North America quite considerably. The move expands its customer base by 400,000, and takes the number of clients on its books to 2.7m.
Accordingly the number crunchers expect it to continue clocking up double-digit earnings growth in the medium term, and a 14% advance is pencilled-in for fiscal 2017 alone.
A subsequent P/E rating of 24.3 times may not leave much room for the shares to climb, at least from a conventional standpoint — this reading sails above the benchmark of 15 times that indicates ‘attractive’ value.
Still, Homeserve’s strong progress across Europe and in the US merits a loftier rating, in my opinion, and I reckon the firm has what it takes to post strong stock value advances in the years ahead.
