This battered growth stock is up 10% today. Is the recovery on?

Cybersecurity firm NCC Group plc (LON:NCC) returns to profit. Paul Summers takes a closer look.

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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.

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Almost exactly one year ago, I suggested that battered Manchester-based cybersecurity firm NCC Group (LSE: NCC) might be a better buy than another stock market loser.

It proved to be the case. Twelve months later, the shares are up almost 9% in value. The other company — Carillion — no longer exists.

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In retrospect, it was never a fair contest. Nevertheless, today’s update from the mid-cap — and the renewed interest in owning its stock — is yet another demonstration of why it can sometimes be a good idea to back companies experiencing significant (but temporary) difficulties. Let’s look at those numbers in more detail.

“Successfully stabilised”

Group revenue from continuing operations rose by 8.3% to £233.2m in the year to the end of May. Perhaps more significantly, the company bounced back into profit by the end of the reporting period, registering a gain of £11.9m compared to the £44.8m loss sustained in 2017.  

More good news included a 36% reduction in net debt (to £27.8m). Assuming this continues to fall, it’s likely that dividends — which were maintained at 4.65p per share for the year — will climb higher in time, thus rewarding loyal holders who stuck with the company when its share price fell through the floor in October 2016 and again in February last year.

Following significant changes to management, an organisational restructure and the sale of non-core units of the business (Web Performance and Software Testing), Chairman Chris Stone reflected that the company has been “successfully stabilised“, adding that expectations for adjusted earnings before interest and tax (EBIT) in 2019 “remain unchanged“.

Taking into account the progress that’s been made and the fact that NCC’s markets “remain buoyant“, it’s perhaps unsurprising that this morning’s figures have encouraged investors to reassess the company, resulting in a 10% rise to its share price.

Whether a valuation of 28 times forecast earnings before today represents good value for a company trying to rebuild itself is questionable, but in a world where the demand for cybersecurity services is only likely to grow, at least some investors appear willing to pay up.

Increased demand

Of course, not everyone wants to buy into a recovery story. One company that’s already doing rather well is international professional services provider FDM Group (LSE: FDM).

Although news flow has been pretty quiet over the last few months, April’s pre-AGM update suggested the business looks like meeting its full-year targets. First quarter revenue from its IT consultants (Mounties) was 17% higher in constant currency compared to 2017 with 3,310 stationed at client sites at the time of the announcement (compared to 2,826 the year before). 

Changing hands for almost 29 times earnings, FDM will be of absolutely no interest to value hunters. Indeed, having more than doubled in price in just two years, a lot of growth-focused investors may regard this valuation as rather frothy.

Since trying to guess the short-term trajectory of any company’s share price is arguably a waste of time, it’s probably better to dwell on those things we do know. These include the consistent (mostly double-digit) rises in earnings, huge returns on capital employed, no debt, a near-3% dividend yield and increased demand for its services from businesses needing to be GPDR-compliant.

Based on these qualities, FDM was never going to be cheap. Just be sure you’ve got a head for heights if you’re considering adding it to your portfolio.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of NCC. 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.

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