So far, this year has been a happy one for shareholders in IT services provider Computacenter (LSE: CCC). Since the turn of the year, the growth stock has jumped 29%. On top of that, the shares have a yield of around 2.7%.
As a long-term investor however, I always try to look at the larger picture. That also looks good in this case. The Computacenter share price has more than doubled over the past five years.
Am I too late to join the party, or could buying this growth stock today potentially offer me the opportunity to enjoy more price gains down the road?
Buying into a company, not just a share price
When looking to add a business to my portfolio, I do not just look at the company’s share price. Instead, like Warren Buffett, I aim to consider whether this is a business I think has strong commercial prospects. I then seek to gauge whether its current share price captures those prospects or not.
The company said in its interim results last month it is on track to grow its adjusted diluted earnings per share for the 19th year in a row.
And with its geographically diversified operations, it can benefit from scale rather than being overly reliant on any one market.
Demand for IT services can move around based on how well the wider economy performs. Some IT spending is essential, though.
Computacenter has a broad base of installed customers, many of whom I expect to keep spending with the specialist provider for years to come. After all, for many people, the first port of call when maintaining or upgrading an IT system is the company that installed it.
Ongoing business strength and positive expectations
The business is consistently profitable but it operates on fairly thin profit margins. Last year’s post-tax profit of £184m on revenue of £6.5bn, for example, equates to a net profit margin of less than 3%.
I see a risk to sales and profits as companies cut back non-essential IT spending due to a weak economy. Indeed, the company’s home UK market has been a struggle lately. The firm’s services income in the UK during the first half fell 5% year-on-year, though total revenues still grew, thanks to the business model combining sourcing with services.
In its third-quarter trading statement today (30 October), the company said the UK remained “difficult”.
However, the business said that quarterly trading overall was in line with its expectations. Although the normally important fourth quarter remains in progress, it expects the full-year performance to show another year of “progress with growth in profitability”.
Valuing the shares
The shares opened slightly down in early trading and the current Computacenter share price means the price-to-earnings ratio is around 14.
As its long-term earnings per share performance highlights, the growth stock benefits from a proven business model that has delivered consistent profits albeit with fairly thin margins. I think the current Computacenter share price looks attractive. If the business keeps growing earnings, that could help support a higher share price.
If I had spare cash to invest, I would happily add the shares to my November stock market shopping list.
