Shares in Bunzl (LSE: BNZL) have delivered a strong first-half performance, with the outsourcing company easily outperforming the FTSE 100. Indeed, shares in Bunzl are up 9%, while the wider index is currently flat year-to-date. With this in mind, is Bunzl still worth buying at current levels? Or is there better value elsewhere in the sector, such as at Serco (LSE: SRP) and G4S (LSE: GFS)?
In a trading statement released prior to its half-year results, Bunzl said it has met expectations and that it remains on-track to deliver positive underlying revenue growth across all of its divisions. Furthermore, it announced two further acquisitions (of Allshoes and JPLUS), which means that it has spent £95 million on acquisitions already in the current year. It also feels there is more scope for further acquisitions in the second half of the year, too.
Interestingly, despite being on-track to deliver improved revenues across its divisions, Bunzl’s bottom line is not forecast to grow in the current year. This is a slight concern for investors, since shares trade on a price to earnings (P/E) ratio that indicates the stock is very much in growth territory. For example, Bunzl’s P/E is 19.1, which is far higher than the FTSE 100 P/E of 14.1, and indicates that growth is being priced in. Even next year, growth in earnings is set to be only 5%, which is in line with the market and means that the company’s valuation could come under pressure.
Of course, the outsourcing sector has been hit hard in recent years by developments at Serco and G4S. They were investigated and forced to repay millions of pounds to the government for errors in their electronic tagging systems. Indeed, earnings have fallen by over 50% at Serco and by one-third at G4S over the last few years, with shares in both companies being highly volatile.
As with Bunzl, both G4S and Serco trade on relatively high P/Es of 17.2 and 18.6 respectively. Although after this year both companies are set to return to relatively attractive levels of growth, the reputational damage of the electronic tagging investigation could take longer to overcome. As such, they could find it challenging to deliver attractive levels of organic growth over the medium term.
So, with all three companies trading on relatively high P/Es, offering only modest growth prospects and (in Serco and G4S’s case) still potentially suffering from reputational damage, the outsourcing sector appears to offer little attraction to investors at present. Due to its relative stability, though, Bunzl seems to be the pick of the three at present.
Peter does not own shares in Bunzl, G4S or Serco.