The Morgan Sindall Group (LSE: MGNS) stock has been one of the stars of 2021 so far. A trading update in April resulted in a quick jump, and the latest update from July provided an extra boost. As we enter August, the Morgan Sindall share price is up 60% since the start of 2021.
The shares were hit by the start of the pandemic. But prior to that, they’d been on a belting run. Those who bought two years ago are looking at a 120% profit. And the shares are up 280% in the past five years. Oh, and there have been dividends thrown in for good measure.
So could we be seeing a one-off post-Covid thing here? It does look more like a resumption of the upward climb that commenced mid-2019 and was brought back down by the virus. Prior to that, though, the shares had been flat for a few years. So what’s behind it all, and will the shares head even higher into August and beyond?
The FTSE 250 construction and regeneration firm’s July update told us it “anticipates that its full year results for 2021 will be significantly ahead of its previous expectations.” The previous update in April had been very upbeat. And this time we heard that since then, “trading has been strong and the positive momentum across the group has continued to accelerate.“
Strong profit growth
With strong performance across all of its divisions, Morgan Sindall expects to report “profit before tax in the region of £53m, reflecting growth of c238% on the 2020 half year result and up c46% on the 2019 ‘pre-pandemic’ comparative period.” If that’s not good enough, at 30 June, net cash stood at £337m (vs £146m a year prior). And the group’s secured workload had reached £8.3bn.
That all sounds lovely, but what’s the catch? I mean, we’ve seen the Morgan Sindall share price soar on the back of growth expectations. And there’s always a catch with sky-high growth stocks, isn’t there?
One thing does concern me. The construction and urban regeneration business is a bit cyclical at the best of times. And right now, it looks like we’re getting into a post-lockdown boom. All those projects that were put on hold due to the pandemic are starting to see the light of progress again.
Morgan Sindall share price bubble?
So I fear the company might have a great 2021, and then see business slowing off in the following years. If that happens, the Morgan Sindall share price might be close to a peak right now. But at current levels, the shares are on a trailing P/E of around 15 based on 2019 results (leaving out Covid-hit 2020).
If earnings per share in 2021 comes in significantly ahead of 2019, that P/E could fall significantly, and Morgan Sindall’s valuation might end up looking too low. And we might not be seeing an over-heated growth bubble after all. On balance, Morgan Sindall makes it on to my list of buy candidates. I’m keenly awaiting those H1 results now.
Alan Oscroft has no position in any of the shares mentioned. 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.