While many investors like to chase ‘hot’ growth stocks in an attempt to get rich quickly, the funny thing about investing is that it’s actually possible to make huge profits from boring, dependable businesses that people rely on.
Take FTSE 250-listed HomeServe (LSE: HSV), for example. This is a business that provides services to protect people’s homes in the event of an unexpected plumbing, heating, or electrical emergency. Not exactly the world’s most exciting business, but one that generates fairly consistent profits, and one that has been a fantastic investment for shareholders over the last five years. Had you picked the stock up for 250p five years ago, you’d now be sitting on a gain of around 260%, plus dividends.
So, what’s next for HSV? Can the shares keep generating gains for investors?
Half-year results, released this morning, look pretty solid in my view. For the six months ending 30 September, revenue climbed a healthy 10% to £404.3m, and adjusted earnings per share rose 10% to 7.5p. Debt was reduced by 4% to £291.9m, and the company also declared an 11% hike in the dividend, which is great news for dividend investors.
Richard Harpin, HomeServe founder and group chief executive, was upbeat about the company’s future, stating: “We have delivered a strong first half and remain confident in our growth prospects for the full year. I am as excited as ever by the opportunities to continue to build our business so that we can help homeowners with every job, in every home.”
These results suggest that HomeServe has momentum at present. But is the stock a ‘buy’ right now?
Looking at HSV’s financials, there’s a lot I like about the company. For example, revenue climbed 65% between FY2013 and FY2018, while net income surged 130% in that time. Return on equity (ROE) – one of Warren Buffett’s favourite metrics – has averaged 20.2% over the last three years, which shows management is good at generating a profit on shareholders’ funds. Dividend growth has been strong as well in recent years, with the company lifting its payout from 11.5p per share three years ago, to 19.1p per share last year. Furthermore, debt (another thing Buffett always analyses closely) looks manageable, as the stock’s debt-to-equity ratio is 54%, and its interest coverage ratio last year was 12.4.
The only issue that does concern me slightly is that the stock’s P/E ratio is a little high. With analysts expecting earnings per share of 36.7p for the year ending 31 March 2019, the forward-looking P/E ratio is 25.4. To my mind, that valuation doesn’t leave a significant margin of safety.
On my watchlist
As such, I believe HomeServe is a stock to watch closely going forward, with a view to picking it up when volatility returns to the market and high-quality companies are on offer at attractive prices. I definitely like the look of the company, but I’d prefer to buy it at a slightly lower valuation.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Homeserve. 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.