This top small cap is walloping its larger rival Capita plc

While Capita plc (LON: CPI) is struggling this smaller rival’s shares have doubled in just five years.

| 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.

These were supposed to be the glory years for outsourcing firms, as austerity measures led local governments to turn to outside help for every available task their depleted budgets couldn’t handle. Instead, the likes of Capita (LSE: CPI) has found itself weighed down by loss-making contracts, profits warnings and a share price that has dropped over 50% in the past year.

Hope on the horizon

The loss of investor confidence isn’t without reason. The company’s operating profits sunk 28% lower year-on-year in 2016 and warned that it didn’t expect a return to profit growth until 2018. The cratering share price also meant relegation from the FTSE 100 and unsurprisingly led to three year CEO Andy Parker being forced out of the job.

The incoming chief will inherit a business that is currently being slimmed down and reorganised. This is a much-needed step for such a sprawling company that tackles everything from collecting BBC TV license fees to mortgage application processing for the Co-operative Bank. Asset sales will also be needed as the company had £1.7bn in net debt at year end, which was a worrying 2.89 times EBITDA.

There is hope on the horizon, though. The group order backlog at year end was stable year-on-year at £3.8bn. The catastrophe that was 2016 will also allow the new CEO to make tough decision about which parts of the business to sell and which to keep. A more focused Capita that concentrates on the high margin private sector white collar work for which it made its name could be an attractive investment.

Although the company’s share may look a bargain at 9.4 times forward earnings I’d hold off making any share purchases until the new CEO can fully explain the company’s new route forward.

A stellar small cap

At the opposite end of the spectrum is relatively tiny staffing firm Impellam (LSE: IPEL). Where larger rivals have floundered shares of the company have returned over 110% in the past five years thanks to a narrowly-focused business model and a series of wise acquisitions.

Impellam’s core business is staffing higher end jobs such as doctors, lawyers and accountants on short term or permanent contracts. This has proven popular with clients and over the past five years the group’s sales have risen over 75%, to £2.1bn annually.

Much of this growth has come through acquisitions and on this front there is very good news. The company’s latest big purchases have extended the group’s reach into major markets such as Australia and the US. And these purchases are showing results already as revenue grew 20.4% year-on-year and a focus on profitability improved EBITDA margins by 21.1% over the same period.

Impellam also has the firepower to continue buying up smaller competitors thanks to a healthy balance sheet where net debt was down to 1.36 times EBITDA. With its shares trading at a very cheap 6.6 times forward earnings I’ll definitely be following this stellar small cap closely in the coming quarters.

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.

Ian Pierce 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

Here’s another top buy from the FTSE 250 I’m considering

Oliver Rodzianko considers this FTSE 250 company a stellar choice for his portfolio. It's on his growth watchlist; so let's…

Read more »

A young Asian woman holding up her index finger
Investing Articles

A “once in a lifetime” opportunity for Rolls-Royce shares?

One firm is hoping now is a “once in a lifetime” opportunity for UK nuclear companies. Our writer reveals whether…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

The IAG share price is dirt cheap and profits are flying. So why am I worried?

After today's positive full-year results, I expected the International Consolidated Airlines Group (IAG) share price to be doing better than…

Read more »

Investing Articles

Is Tesla stock a steal below $200?

Tesla stock has fallen 19% so far in 2024. Currently hovering around $200, this Fool checks if now is the…

Read more »

Investing Articles

3 high-yield dividend stocks to consider for my passive income portfolio in 2024

I want to build a portfolio of dividend stocks that pay enough passive income to retire comfortably. Here are my…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Direct Line shares soar 25% on takeover bid!

Direct Line shares surged by a quarter on Wednesday, after receiving a takeover bid from a Belgian rival. But the…

Read more »

Investing Articles

Will it be too late to buy Nvidia stock in March?

NVIDIA stock is up more than 60% since the start of 2024. Our writer considers whether it might still be…

Read more »

Typical street lined with terraced houses and parked cars
Investing Articles

Why did Direct Line shares just soar 27%?

Direct Line shares have jumped more than a quarter in the course of today's trading session. Our writer explains why…

Read more »