The perilous outlook for Britain’s outsourcers was once again laid bare by Mitie Group’s latest trading statement on Monday.
The business issued its second profit warning in as many months after announcing a 39.1% plunge in operating profits during April-September.
Mitie commented that “performance in the first half of the year has been impacted by changing market conditions as clients adjust to rising labour costs and economic uncertainty.” And the FTSE 100 company again bemoaned the uncertainty created by the EU referendum on demand for its services.
Fears that these problems are set to worsen as the UK government tackles the Brexit hot potato has seen investors charge out of the support services segment with gusto. Bunzl (LSE: BNZL) has seen its share price skid 14% lower during the past month alone.
But I believe investors may be missing the point here. Whilst not excluded from the troubles washing over the British economy, Bunzl’s vast international presence provides a terrific growth platform for the near-term and beyond. Indeed, the company sources almost 60% of sales from North America alone.
And while many of its sector rivals have been taking the red pen to their profits forecasts, Bunzl announced last month that third-quarter trading remained in line with expectations, with group revenues rising 7% in the period.
The distribution specialist has also benefited from the significant fall in sterling following June’s referendum, it announced.
The City certainly expects earnings at Bunzl to keep rising, and have pencilled in rises of 13% and 8% for 2016 and 2017 respectively.
While a P/E rating of 19.5 times may be a tad heavy on paper, I reckon the diversified nature of its operations — allied with its brilliant geographic footprint — makes Bunzl a brilliant pick for those seeking hot growth stocks.
Fly away
Engineering play Rolls-Royce (LSE: RR) has also been subject to massive selling in recent sessions, the share shedding 13% of its value in less than a week.
Rolls-Royce’s latest bout of weakness was prompted by a disastrous trading statement in which it advised that there are “no signs of recovery yet in offshore oil and gas markets,” casting fresh fears over the outlook of its Marine division. The company also warned that conditions for its Power Systems arm remains mixed.
But tough conditions on the ground are not Rolls-Royce’s only problem, with fears persisting over the state of the company’s cash flow. The business expects to generate negative free cash flow of £100m to £300m in 2016, the firm advised last week.
As if these issues weren’t enough, appetite for Footsie giant received another blow on Friday after Emirates advised of technical problems with Rolls Royce’s Trent 900 engines. The race is on for ‘Double R’ to resolve the problems before the hardware, due to power 50 of the airline’s Airbus A380 fleet, is delivered next month.
With Rolls-Royce’s decision to overhaul its accounting practices also throwing in plenty of confusion regarding the company’s profits, I reckon investors should give the firm short shrift, particularly given its heady prospective P/E ratio of 26.6 times.
