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This FTSE 250 growth stock looks FTSE 100-bound to me!

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On what has been a fairly quiet day on the London market, one company’s share price stands out to me. Springing out of the blocks in early trading was FTSE 250 member and IT services provider Computacenter (LSE: CCC). What’s got investors excited?

Beating expectations

It’s all seems to be down to an encouraging (albeit unscheduled) trading update.

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Today, Computacenter announced that business in both July and August had been “robust” in all areas of the world where the company operates. The £3.5bn cap anticipates adjusted pre-tax profit being 10% ahead of analysts’ current projections. Importantly, this could be achieved “even with a flat performance in the second half of 2021 compared to the second half of last year”. That’s bullish talk!

In essence, today’s update was a nudge to the market that it was being too conservative about CCC’s prospects. We’ll get far more information when it officially reveals interim numbers on 9 September. 

FTSE 100 bound?

CCC is up 2.5% as I type, logging yet another all-time share price high for the firm. For perspective, the stock has now gained 47% in 12 months and over 300% since 2016. For me, this is yet further evidence that market-beating returns can be generated simply through spotting great companies before the herd. Just buy and hold.

No one knows what will happen for sure in the next few weeks or months for the Computacenter share price. Notwithstanding this, I’m confident that it remains a great long-term option for a (mostly) growth-focused investor such as myself. Actually, I think this FTSE 250 stock could end up being promoted to the FTSE 100 in a few years, especially when I look further under its bonnet. 

Big clients

For one, it boasts a strong list of corporate customers. These include Costa Coffee, broadcaster Channel 4, cereal titan Kellogg’s and FTSE 100 firm Royal Mail. On top of this, the mid-cap provides support for public sector organisations such as the Foreign and Commonwealth Office. Its large and diverse set of clients gives me confidence that its earnings will never collapse.  

CCC also gets another tick from me for its sound finances. It has long had net cash on its balance sheet. In addition, rising free cash flow has allowed it to hike dividends fairly consistently. In a financial industry plagued by obfuscation, a firm’s attitude to its payouts is indicative of whether trading really is as healthy as stated.

Great…but not perfect

Obviously, there’s no sure thing in investing. Computacenter acknowledged this today when it reflected that earnings visibility in its line of work is “never perfect“. And while the company has done seriously well since March 2020’s market crash, there’s nothing to say that a market correction — perhaps beginning over in the US — won’t put a temporary hold on progress. 

It’s also worth acknowledging that operating margins have been, are, and will likely stay, thin. As someone who intentionally looks for businesses with low costs relative to sales, this is something I wouldn’t usually be comfortable with. 

Nevertheless, I remain bullish on this FTSE 250 stock. With a “substantial order backlog” and a commitment “to beat last year’s second half performance, not just match it”, CCC is a company I’d feel comfortable adding to my portfolio today. A valuation of 21 times earnings still looks reasonable, relative to sector peers.

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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.

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