Today’s first-half results from support services group Serco (LSE: SRP) may be slightly better than expectations, but they show a company that has a long, hard road to recovery ahead of it. And, while its shares have risen by as much as 2% today, they are still down 21% since the turn of the year, leaving most of its investors deep in the red.
In the first half of the current year, Serco saw its pretax profit fall from £10.9m in the first half of 2014 to a loss of £76.2m. The reason for such a major decline in profitability is £117.4m in exceptional costs, with Serco being hit by refinancing costs as well as considerable asset impairments. In addition, revenue declined from just over £2bn in the comparable period of 2014 to less than £1.8bn in the first half of 2015, as Serco’s contracts to run the Docklands Light Railway in London as well as the National Physical Laboratory came to an end. As a result of its challenging half year, Serco will pay no interim dividend.
Looking ahead, Serco looks set to be on the cusp of a real fight to win back its reputation, customers and also investors after a hugely challenging period for the company. This, though, will take time and, while Serco is expected to post a trading profit for the full year of £90m, this excludes the impact of writedowns and, as a result, a loss for the full year remains a distinct possibility. While the company’s management team is clearly doing a good job in turning the company’s fortunes around and appears to be taking prudent steps to do so, there appear to be better opportunities available within the FTSE 350, since things could get worse for Serco before they get better.
One such opportunity is Barclays (LSE: BARC). Unlike Serco, it is hugely profitable and is forecast to increase its bottom line at a rapid rate over the next couple of years. And, despite such strong growth prospects, Barclays continues to offer excellent value for money, with it trading on a price to earnings growth (PEG) ratio of just 0.4, it appears to offer huge upside potential.
Furthermore, Barclays has the potential to become a superb income play, too. That’s because it is targeting a payout ratio of around 45% over the medium term. With earnings per share set to reach over 28p next year, this means that Barclays could be set to pay out at least 12.6p per share in dividends per year over the medium term. At its current share price, this equates to a yield of 4.5%, which would undoubtedly help to improve investor sentiment and push the bank’s share price higher.
Meanwhile, the house building sector also has huge potential and prime property group, and Berkeley (LSE: BKG), remains a top notch investment. Certainly, its shares have risen significantly in recent months, with them being up 42% since the turn of the year. However, they still trade on a very appealing valuation with, for example, Berkeley currently having a PEG ratio of just 0.2. And, with their yield still being 4.5% despite such a strong share price rise, they seem to offer a potent mix of growth, income and value potential.
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Peter Stephens owns shares of Barclays and Berkeley Group Holdings. The Motley Fool UK has recommended Barclays and Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.