Sometimes, it’s the stocks no one really talks about that make the best investments. Today, I’m asking whether this might be the case with a certain company in the FTSE 250.
FTSE 250 wealth-builder
IT services provider FDM Group (LSE: FDM) is unlikely to make headlines. The company recruits and trains graduates, ex-services personnel and those wanting to return to work in technical skills. In return for this instruction, FDM’s consultants — otherwise known as Mounties — then work for the £1.2bn cap for a minimum of two years.
From an investment perspective, this business model was never going to compete with glitzy tech stocks whose share prices have shot the lights out over the pandemic. Nevertheless, anyone buying FDM’s stock in March 2020 will have seen their holding more than double in value. That’s a superb return. It’s also far better than the 33% or so seen in the FTSE 250 as a whole.
The shares are rising again today following the release of FDM’s latest set of interim results.
Rising demand
Revenue may have fallen 7% to £131.3m over the first six months of 2021, but it’s important to put this in context. FDM had a great Q1 before Covid-19 arrived in 2020. This means that the number of Mounties being deployed so far in 2021 always had the potential to be lower.
Moreover, some regions seem to be doing better than others. Collectively, revenue growth of 15% was logged for Europe, the Middle East and Africa. In the Asia Pacific region, a 24% jump was seen. On the flipside, demand in the US had been “more subdued“.
Pre-tax profit fell 3% to £20.5m. That said, the latter was actually 9% higher (at £22m) on an adjusted basis.
Perhaps most tellingly, the FTSE 250 member stated that it had significantly increased recruitment and training levels over the first six months of 2021 to meet demand. As a potential investor in a forward-looking market, this is the sort of signal I’m hunting for. I also like the fact that 31 of 37 new clients come from outside of financial services, helping to diversify earnings across sectors.
Frothy valuation
Signing off today’s statement, CEO Rob Flavell said that FDM was “well placed” to hit expectations for its full year. This suggests there could be further upside to the FDM share price, especially if operations in the US bounce back to form.
For balance, however, it’s worth considering a few risks.
One that jumps out at me is the current valuation. Before markets opened this morning, FDM shares were trading on a heady forward earnings multiple of 36. Now, I think the company’s consistently high returns on capital and margins go some way to supporting this. FDM also boasts a solid balance sheet, which is more than you can say for some stocks in the FTSE 250.
Even so, I can’t deny that the recovery in business looks pretty priced in. And as Boris Johnson continually stresses, we’re not in the clear just yet. Any disappointing results could send the shares downwards.
Watchlist addition
I doubt this FDM will ever set the market on fire. Assuming I wasn’t attempting to grow my portfolio at a faster clip at potentially greater risk, however, I’m inclined to regard FDM as a decent addition to a suitably diversified portfolio.
For now, it stays on my watchlist until a potentially better entry point appears.
