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At today’s share price, I believe Capita is a double-your-money stock

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This former darling of the FTSE 100 has suffered quite a spectacular fall from grace. Not so long ago, Capita’s (LSE:CPI) share price stood at around 800p a share. Nowadays, after an 83% fall, the shares trade for about 137p.

Understandably, previous investors in this company upon reading the title may be keen to suggest I visit a well-qualified mental health professional. However, recent results signal that a reversal of fortunes may be on the cards.

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Broadly, Capita’s areas of activity can be divided into three segments: software, outsourced services and IT services, all of which are forecast to grow for the foreseeable future.

Recent history

Shortly after taking up his position as chairman in 2016, Sir Ian Powell appointed Jon Lewis as CEO to solve the nascent difficulties that were becoming increasingly apparent.

Following an initial assessment, Lewis announced a profit warning, dividend suspension, a £700m rights issue, cost cutting, a disposals programme, details of poorly performing contracts and a pensions deficit of around £380m.

If this wasn’t enough to send the share price plummeting, a number of blue chips – including British Airways – opted to retain in-house operation of services rather than renew contracts with Capita. 

The present

Now Lewis is over a year into a three-year turnaround programme and things are not so bleak. As a result of the rights issue and sale of non-core assets, debts have been reduced to more manageable levels.

Problem contracts such as those with the British Army and the NHS are turning a corner. Also, further evidence of management effectiveness has been provided by the revamping of the contract with Mobilcom-Debitel – one of Germany’s largest mobile and telecoms products providers.

Announced on the recent half year results conference call was a host of savings already made and further economies scheduled to take effect in the year ahead.

Whilst it is true that revenue has declined slightly, this is the result of the loss of low-margin government contracts. In fact, much of lost revenue was replaced by higher-margin contracts.

Capita recently announced that it has signed a contract worth £525m over 12 years to modernise and support improvement to the operational effectiveness of the Ministry of Defence’s fire and rescue service. Also noteworthy were the nine contract wins for six police forces in the USA, this against stiff competition.

Valuation

Right now, Capita trades at a compelling valuation and better value than other growth stocks. Perhaps the most commonly used investor tool, the P/E ratio, is less than ten. On top of that, earnings per share is on an upward trend. Given that the latest results gave the share price a boost of 15%, it would seem that now is the time to buy the recovery story.

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Bryan owns shares in Capita. The Motley Fool UK has no position in any of the shares mentioned. 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.

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