Are these FTSE 100 stocks getting too expensive?

Are these two FTSE 100 (INDEXFTSE: UKX) shares getting ahead of themselves after recent gains?

| 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.

Pest control company Rentokil Initial (LSE: RTO) today reported a 13.7% rise in ongoing third-quarter revenues to £579.5m, as the contribution of recent acquisitions helped to bolster its financial performance.

Organic growth

However, organic revenue growth also accelerated from 3.1% last year, to 3.7%, reflecting strong demand increases for its pest control products and higher brand popularity. Rentokil highlighted continuing strong performances in Asia, Pacific, Latin America, and in its largest market, North America, while Europe also delivered a further improvement in ongoing revenue expansion, with revenues in France up 2.4% year-on-year.

On the downside though, the firm warned of disruption to trading from recent hurricanes, which devastated the Caribbean and some southern states in the US in September. Though trading has now returned to normal in most of these markets, business in Puerto Rico is expected to remain severely impacted for some time.

Ongoing progress

Nevertheless, CEO Andy Ransom was pleased with the ongoing progress and in today’s announcement said: “It has been a good period for M&A with six businesses acquired in Growth and Emerging markets, principally in Pest Control…Notwithstanding the impact of severe weather conditions on some of our businesses in the third quarter, prospects remain good for the remainder of the year across the majority of our markets, and our guidance for the full year is unchanged.”


City analysts are sanguine with forecasts of underlying earnings per share growth of 12% in 2017 and 9% in 2018.  However, I’m concerned about valuations — shares in the company trade at 25.2 times forward earnings, against its five-year historical average of 17.2 times.

Too pricey

Another FTSE 100 stock that I believe is beginning to look too pricey is product inspection services firm Intertek Group (LSE: ITRK). The London-headquartered group is one of the world’s leading providers of assurance, testing, inspection and certification services to a wide range of industries, which include chemicals, energy, food, retail and healthcare.

Although the company’s revenue stability and its highly cash generative earnings model have meant Intertek has historically traded at a premium to the rest of the market, its shares appear to me to be getting ahead of themselves after recent gains.

Intertek has seen its share price gain 49% since the start of the year, which has elevated its valuations to 27.5 times expected earnings this year. That compares unfavourably to its five-year historical average for forward P/E of 21.9 times and puts the stock on a significant premium to the sector median of 17.1 times.

What’s more, this doesn’t seem justified on City forecasts for underlying earnings per share growth of 11% in 2017 and 7% in 2018, which are only modestly higher than the estimates for its sector peers. As such, I reckon that Intertek’s stock may struggle to gain traction in the near term, in the absence of substantial positive earnings estimate revisions.

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.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Intertek. 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.

More on Investing Articles

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 »

Young black colleagues high-fiving each other at work
Investing Articles

2 cheap dividend stocks I’d snap up in a heartbeat!

This Fool is on the look out for quality dividend stocks and earmarks these two firms as great options to…

Read more »