One bargain stock I’d pick over Capita plc

Paul Summers is still avoiding battered outsourcer Capita plc (LON:CPI) and thinks one of its peers could be a safer bet.

| 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.

Following the perhaps inevitable demise of Carillion, it’s no surprise if market participants are wary of throwing their capital at outsourcing firms at the moment. Another that’s been hit hard by poor sentiment following a Brexit-related slowdown in the UK economy has been Capita (LSE: CPI).

Since I last looked at the company back in December, stock in the £1bn cap — which provides ‘efficiency’ services to a wide range of businesses in the public and private sectors — has continued to sink in value. Much of this can be attributed to January’s announcement that it would be launching a £700m rights issue in order to bring the company back on track following a spate of profit warnings.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

More recently, Capita has revealed that it has created a new position — the interestingly-titled Chief People Officer — who will take a broom to the company’s staff roll. The successful candidate and former Amec Foster Wheeler man, Will Serle, now supports CEO Jon Lewis in the latter’s attempts to the turn the struggling company around. 

Although full-year results have now been delayed while the aforementioned (heavily discounted) rights issue is finalised, we do know that Capita also plans to offload a number of its businesses to address its seriously overburdened balance sheet as well as focusing on those markets that offer the greatest upside in terms of growth.  

Investing in turnaround stocks can be a profitable endeavour so long as you possess sufficient skill or luck in selecting the right companies. When it comes to Capita, however, I think the risk of further downward pressure on the share price remains too great.

Instead, I’d consider industry peer Kier Group (LSE: KIE).

A safer bet?

Today’s interim numbers, while falling short of analyst expectations, weren’t disastrous. Underlying revenue rose 8% to £2.15bn in the six months to the end of 2017. Underlying pre-tax profit also increased by 5% to £48.8m. Positively, the Sandy-based business reported good returns on the money it has invested in both its Property and Residential divisions (23% and 11% respectively). 

Looking ahead, Kier revealed that 100% of its forecast revenue in its Construction and Services divisions had been secured for the year to the end of June and more than 65% secured to June 2019. The order book here now sits at £9.5bn. There’s also a £3.5bn pipeline in its Property and Residential Divisions.

According to CEO Haydn Mursell, the £1bn cap’s portfolio gives the company “balance and resilience“.  He went on to reflect that the firm looks set to deliver “double-digit profit growth” in 2017/18 and remains on track to achieve its strategic targets.

In contrast to Capita, Kier’s balance sheet appears in far better shape. Although net debt rose to £239m (from £179m in the previous year) as a result of ongoing investment, this is expected to be equivalent to “less than 1 times” earnings before interest, tax, depreciation and amortisation (EBITDA) by the end of June. A reduction in the company’s “minimal” pension deficit to £19m is also encouraging and a massive contrast to the situation at Capita. 

While a 2% hike to the interim dividend may not seem much, it’s also worth mentioning that Kier is forecast to yield a (seemingly affordable) 6.8% yield in the current financial year. 

Trading on 9 times earnings, I think the business warrants attention from those looking for value and/or income.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Paul Summers 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.

More on Investing Articles

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

Here’s a FTSE 250 stock to buy to benefit from the construction boom!

Jabran Khan details a FTSE 250 stock that could be primed to benefit from the infrastructure and construction boom.

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Is the Royal Mail share price a buying opportunity?

With a 6% dividend yield and a price-to-earnings ratio of 3, is the Royal Mail share price in buying territory?…

Read more »

Scene depicting the City of London, home of the FTSE 100
Investing Articles

3 FTSE 100 shares! Should I buy them?

I'm searching for the best FTSE 100 stocks to buy following recent market volatility. Are these blue-chip UK shares too…

Read more »

macro shot of computer monitor with FTSE 100 stock market data in trading application
Investing Articles

Should I buy one of the cheapest shares on the FTSE 100 index?

This Fool explores one of the cheapest stocks on the FTSE 100 index by share price and decides if he…

Read more »

Asian Indian male white collar worker on wheelchair having video conference with his business partners
Investing Articles

With trading suspended, where could the Eurasia Mining (LON:EUA) share price go next?

This morning, the EUA share price was suspended pending an announcement - so could improving sales send the share price…

Read more »

Hand holding pound notes
Investing Articles

Are the FTSE 100’s top income stocks a bargain?

The FTSE 100 is renowned for its value and dividend stocks. So, are the index's top income stocks worth a…

Read more »

Compass pointing towards 'best price'
Investing Articles

Scottish Mortgage shares have slumped 40%. Time to buy now?

Scottish Mortgage Investment Trust (LON: SMT) shares have rewarded shareholders well in recent years. I'm thinking of buying now they're…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

3 recession stocks I’d buy in a hurry

With the economic outlook getting worse, our writer highlights a trio of recession stocks he would consider buying for his…

Read more »