For shareholders of takeover targets, that’s translated into impressive, sudden gains. For example, Alpha Group International surged by over 25% in a single day back in July, with Deliveroo delivering similar gains just a few months before.

Clearly, investing before a takeover is announced can lead to some explosive results. And there could be more deals on the horizon with rumours of takeover bids circulating for several FTSE shares, including ITV (LSE:ITV), Hiscox (LSE:HSX), and Serco (LSE:SRP).

Sadly, rumours and reality don’t always cross paths, and suspected bids may never happen. Therefore, investors can often achieve better results by treating a potential takeover as a bonus rather than a leading reason to buy. With that in mind, is there a potential opportunity with these three stocks?

The three stocks

Takeover speculation surrounding these businesses is being driven by a variety of factors. But one common theme among these businesses is their relatively cheap-looking valuation, which could mean opportunity for smaller investors regardless of takeover talk. For reference, on a forward basis, the price-to-earnings ratios of these UK stocks hover between an inexpensive 9 and 14.

However, there are other potential catalysts beyond valuation:

• ITV – repeated reports of interest in acquiring the group’s Studios segment by RedBird IMI and Banijay to take advantage of the firm’s global monetisable content portfolio, paired with ongoing licensing deals
• Hiscox – increased takeover activity within the London-listed insurance sector as bolt-on acquisitions for larger international players to expand into the UK market
• Serco – rising investment interest in the defence and government services industry, combined with the group’s operational improvements and expanding order book, makes it potentially attractive to bidders

Is a takeover likely?

As previously demonstrated, investing before a takeover is announced can yield some lucrative returns. However, it’s an exceptionally risky strategy given that rumours often don’t turn out to be true, even with early signals such as strategic review announcements.

Having said that, looking at these three potential deals, ITV seems the most likely to be targeted given the recurring interest from third parties. That obviously doesn’t guarantee anything.

Therefore, long-term investors need to focus more on the underlying business rather than speculating on a potential buyout. And encouragingly, ITV does show some promise here.

Total streaming hours continue to climb by double digits, annual non-content cost savings are expected to reach £45m this year, and organic revenue growth is on track to recover with profit margins normalising as content investments are trimmed.

The company still remains highly sensitive to the cyclicality of the advertising sector. Given that ad-based revenues lie at the centre of the group’s business model and its flagship ITVX platform, this can create some tricky situations, especially in the current macroeconomic climate.

Nevertheless, I feel there’s a solid investment thesis to be made here for the long term. But investors will need to investigate further to determine whether the risk’s worth the reward for all three of these British stocks.

The post These 3 UK stocks are rumoured to be takeover targets appeared first on The Motley Fool UK.

Another mid-cap stock doing well is Serco (LSE: SRP). Up 31% year to date, it’s now at an 11-year high!

Defence boost

Serco’s a government outsourcing specialist with fingers in many pies (transport, justice, immigration, hospitals, and more). But defence is the firm’s largest sector, now contributing around 40% of revenue. It does things like manage army bases, provide support for the Royal Navy, and run military training centres.

Yesterday (26 June), Serco released a stronger-than-expected update for the first six months of the year. Revenue is expected to tick up 2% year on year, while underlying operating profit will be at least £140m, with a “continued strong margin” of around 5.9%.

Order intake was robust, with around £3bn of contract awards, and a high weighting of those from the defence sector. The company also snapped up MT&S, Northrop Grumman’s mission training and satellite ground network communications software business.

This $327m acquisition enhances Serco’s presence in the booming North American and global defence markets. With rising military budgets, this could prove to be a canny purchase. It’s expected to deliver revenue of around £130m this year.

Looking ahead, Serco lifted full-year revenue guidance from £4.8bn to £4.9bn, boosted by higher-than-anticipated activity levels in the immigration sector. It expects underlying operating profit of £260m.  

Two concerns

The stock looks fairly valued at 12 times forward earnings. There’s also a well-supported 2.3% forecast dividend yield too.

However, I have a couple of concerns that put me off here. First, the company’s forecast growth rates aren’t that high. The City sees revenue rising from £4.8bn in 2024 to £5.2bn in 2027. That’s a compound annual growth rate of about 2.7%.

In an era when both defence and immigration services are tipped for strong demand, I find that a little uninspiring. Then again, earnings are expected to grow 8% in 2025 and 2026, so the stock could easily keep chugging higher.

My second issue is that immigration services are a double-edged sword. On the one hand, Serco has vast experience housing and transporting asylum seekers, as well as running detention centres. These contracts provide steady cash flows.

The structural drivers for immigration and migration are clear, from climate change to geopolitical uncertainty, there will be and probably remain for many decades to come, high levels of migration in certain parts of the world.

Serco CEO Anthony Kirby, 2024 earnings call.

On the other hand, there’s the risk of reputational damage if allegations of mistreatment or poor conditions hit the headlines. That could jeopardise contract renewals and damage investor sentiment.

Should I buy Serco?

Weighing things up, I’m not going to add the stock to my portfolio. I’m happy with my current exposure to the defence industry. But this might be a FTSE 250 stock to consider for those who don’t want to invest in arms manufacturers.

Serco’s gaining exposure to rising global defence spending, which is one of the hottest trends in the market today, so the stock could have further to run.

The post This FTSE 250 stock just hit an 11-year high! appeared first on The Motley Fool UK.

As I type though, the daily gain has pulled back a bit to 5%.

Longer term, Serco stock has been disappointing. It’s down 63% over the past 15 years, despite doubling from a multi-year low in November 2018.

So why the rise?

Serco is a multinational outsourcing company that provides public services across various sectors, including defence, transport, health, justice, and immigration. It has its fingers in a lot of pies. 

Today, the company announced that it has bagged three contracts worth over £1bn from the Ministry of Defence to provide maritime services for the Royal Navy. These include delivering port services and helping introduce 24 new navy vessels, as well as various maritime training support services. 

After a few up-and-down years, Serco seems to be finding its groove. Other recent defence wins include a 10-year contract to carry out a joint recruitment service for all UK military personnel, and a $247m deal to support soldier readiness and performance within the US Army.

While last year’s revenue was basically flat at £4.8bn, order intake grew 7% to £4.9bn, giving a total order book of £13.3bn. Underlying earnings per share (EPS) increased 9% to 16.7p, while it carried out a £140m share buyback and hiked the dividend by 22%.

Valuation

Meanwhile, the valuation doesn’t look too demanding. The forward price-to-earnings ratio is around 11, which is pretty reasonable.

However, the forecast dividend yield currently stands at a modest 2.6%, so I would be hoping for future share price gains to make this stock worth buying.

On that front, there should be plenty of growth opportunities for Serco over the next few years, especially in defence and immigration. It entered 2025 with the highest level of potential new work in more than a decade, at £11.2bn.

That said, it’s still at the mercy of government contracts. Last year, it lost a long-standing contract to manage Australia’s immigration detention centres. So contract losses are an unavoidable risk here.

Should I buy?

The firm has often garnered negative headlines due to the politically sensitive areas in which it operates. High-profile scandals in the past have included overcharging the UK government for electronic tagging of offenders, and allegations of mistreatment in some immigration detention centres.

The company has worked hard to improve its reputation, and it undoubtedly does a lot of good work in keeping essential public services running.

However, it’s currently at the heart of another highly politicised issue in the UK. That is managing private accommodation for over 30,000 asylum seekers across England.

To facilitate this, Serco is offering private landlords five-year guaranteed rent agreements, even if the property is vacant. While this makes financial sense rather than paying for costly hotel accommodation, which the firm likewise helps manage, it’s also controversial. Some local councils and MPs are resisting, with Serco becoming a bit of a political lightening rod.

Weighing things up, I don’t really want all this baggage in my portfolio, especially when Serco’s profit margins are quite low at around 3%-4%. So it’s a pass from me on this one.  

The post Here’s why UK stock Serco jumped 7% in the FTSE 250 today appeared first on The Motley Fool UK.

Labour wants to fast-track the building of affordable housing, which is likely to benefit home building and construction companies like Vistry (LSE: VTY) and Balfour Beatty. And a pledge to increase healthcare appointments and recruit more staff could benefit a real estate investment trust (REIT) like Primary Health Properties.

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Public infrastructure is another key sector that has historically benefitted from a Labour government, so companies like Kier Group and Serco (LSE: SRP) should do well. 

But there may be more factors at play. I decided to take a closer look at two of these stocks to see if the new policies are enough to make a difference.

Vistry

Following the election result, Vistry CEO Greg Fitzgerald spoke enthusiastically of the company’s aim to support Labour’s affordable housing goals. The government has reinstated the mandatory housebuilding targets that the Tories scrapped, with a target to build 1.5m new homes in the next five years.

Not that Vistry needs the boost. The share price is already up 92% in the past year. In its latest results posted in April, revenue increased 29% and net income was up 9.3%. However, higher expenses meant profit margins fell 7.4% and earnings per share (EPS) missed analyst estimates by 20%.

But can the shares keep growing? With a price-to-earnings (P/E) ratio of 20.1, they look a bit overbought to me. Even with strong earnings, I wouldn’t expect much more price growth. The Taylor Wimpey price, by comparison, is only 15.9 times earnings AND it sports a 6.1% dividend yield. So while Vistry looks promising, investors may want to consider Taylor Wimpey instead.

Serco

Serco is one of the largest public service providers in the UK. From resourcing and security to energy and reforestation, it has its fingers in many pies. It’s had a good year so far, with the share price up 15%. But it still has a long way to go to recover the massive losses it suffered in the mid-2010s. An overcharging scandal and controversy around a migrant detention centre in Australia wiped 80% off the price between 2013 and 2015.

But with earnings growing at a rate of 22% and debt down 30% in the past year, things are looking up. Last year, Serco was awarded a contract to manage the UK’s air defence radars and more recently, renewed two contracts with the European Laboratory for Particle Physics (CERN), valued at £22.3m. It also turned down a buyout offer from US firm American Industrial Partners.

Despite its chequered past, it appears to be going from strength to strength. Still, it faces stiff competition from the likes of G4S, Babcock and Mitie Group. Its profits rest on securing government contracts, so any misses there could hurt the share price. All things considered, it looks like a steady gainer so I will hold my shares for now.

The post Are these the best stocks to buy after the UK election? appeared first on The Motley Fool UK.

Alphabet

What it does: Alphabet is the operator of Google and a leading innovator in advanced technology, including AI.

By Oliver Rodzianko. I recently increased my Alphabet (NASDAQ:GOOGL) holdings by 33%. I consider the firm to have an immense moat in online search and data. Additionally, I think its AI is going to be highly valuable over the long term.

Even considering the recent troubles with its Gemini model, where users have experienced counterfactual responses, the share price is too good for me to ignore.

Usually, technology firms trade at a valuation which is way higher than Google’s. I’m pleasantly surprised by this, and I consider the shares 20% undervalued.

Also, Alphabet is one of billionaire Bill Ackman’s biggest holdings. So, I’m pretty confident the investment is going to perform well over the long term.

However, I think the organisation could use a little more internal efficiency. Hopefully, its further integration of AI in the workplace will drive this, and the returns could be even better in the future than they have in the recent past.

Oliver Rodzianko owns shares in Alphabet.

Apple

What it does: Apple is a technology company that specialises in smartphones, computers, laptops, and tablets. 

By Edward Sheldon, CFA. Apple (NASDAQ:AAPL) shares have pulled back recently and I have been buying a few more of them for my portfolio. 

I’m not expecting Apple’s share price to surge in the near term. At the moment, the company is not generating a lot of revenue growth. Meanwhile, its valuation still looks quite full (the price-to-earnings ratio is about 24).  

However, taking a longer-term view, I believe the shares still have a lot of potential. Around the world, Apple has around 1.5bn iPhone users. So, just wait until the company launches an artificial intelligence-enabled smartphone. I reckon this could propel revenues, and the share price, much higher. 

I’ll point out that competition from rivals does present a risk, especially in China, where other brands such as Huawei and Oppo are having a lot of success. 

I’m comfortable with this risk though. I’m backing Apple to fend off the competition and remain a top player in the global smartphone market. 

Edward Sheldon owns shares in Apple.

Apple

What it does: Apple is a world leader in the consumer electronics industry. It’s best known for its production of the iPhone and iMac.

By Charlie Keough. Apple (NASDAQ: AAPL) was one of the first stocks that I ever purchased. Over the years, I’ve gradually been adding to my position.

I most recently bought some more shares for a few reasons. Firstly, I remain bullish on what Apple can do in the artificial intelligence space in the years to come.

It also recently upped its dividend payout to $0.25 per share, a 4% rise. Alongside that, it announced an additional share buyback programme worth $110bn, the largest ever buyback authorisation by a US company.

Flagging sales continue to be the biggest threat to the business. In China, which represented nearly 20% of Apple’s sales last year, revenues have taken a hit as spending has hit the brakes.

Nevertheless, Warren Buffett recently said the iPhone was potentially “the greatest product, of all time”. It’s for reasons like that I plan to hold the stock for a very long time.

Charlie Keough owns shares in Apple.

CRH

What it does: CRH is the largest supplier of building materials like asphalt and cement in North America and Europe.

By Royston Wild. Shares in CRH (LSE:CRH) have trended lower as expectations of interest rate cuts in the US have dwindled.

The building products supplier sources three-quarters of earnings from the States. So muted action from the Federal Reserve in the coming months could be a big drag on the company.

Yet this hasn’t dulled my appetite for the FTSE 100 stock. CRH — which supplies a wide range of building products in 29 countries — has significant long-term growth potential.

CRH should benefit from phenomena like rising urbanisation and decarbonisation across its global markets, and soaring infrastructure spending in the US.

Ongoing M&A activity gives it an excellent opportunity to capitalise on these trends, too. It made 22 fresh acquisitions in 2023 alone.

City analysts believe CRH’s share price will rebound strongly in the short term, too. The company has an average 12-month price target of £74.60 based on 19 brokers’ forecasts, up markedly from current levels.

Royston Wild owns shares in CRH.

Serco

What it does: FTSE 250 member Serco is an outsourcing group providing services in areas such as immigration, justice, healthcare and defence.

By Roland Head. Outsourcing group Serco (LSE: SRP) says it won £4.6bn of new business last year, supporting a year-end order book of £13.6bn.

The outlook for new contract wins also seems to be strong. Management says that Serco’s pipeline of potential new work rose by 28% to £10.1bn during the second half of last year – the highest level in a decade.

My analysis of Serco’s 2023 accounts suggests the group is on a solid financial footing at the moment. Debt levels are down and last year’s numbers show good cash generation, with improved profit margins.

The main risk I can see is that Serco could run into problems with a major contract, incurring big losses. I don’t see any sign of this at the moment, though.

Indeed, Serco shares look decent value to me on 12 times earnings. I think they could have further to go, and recently added them to my portfolio.

Roland Head owns shares in Serco.

TSMC

What it does: Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest contract chip manufacturer.    

By Ben McPoland. I recently added to my holding in TSMC (NYSE: TSM). Unlike rivals Intel and Samsung, it doesn’t design its own chips. Instead, it just manufactures them for others, including tech giants like Tesla, Nvidia and Apple.

This means it is agnostic as to who wins the AI race. If this technology is really going to transform every industry long term, then TSMC should certainly benefit.

In Q1, revenue grew 13% year on year to $18.8bn, while its net profit margin was an incredible 38%. The firm’s CEO said: “Almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing power.”

Now, the firm is still seeing weaker demand in smartphones and electric vehicles. So one risk here is a slowdown in the AI boom, which could harm projected revenue growth.

However, TSMC remains a key enabler of the whole digital revolution. I don’t expect that to change. Meanwhile, the stock looks very reasonably priced at 20 times forecast earnings.

Ben McPoland owns shares in Tesla and TSMC. 

The post 5 stocks that Fools have been buying! appeared first on The Motley Fool UK.

Increased threats to Europe have sent defence budgets soaring. Both large and small UK companies are stepping up to provide arms, intelligence and cyber defence technology. It’s common knowledge that BAE Systems and Rolls-Royce have done well lately, but they’re not the only UK defence stocks.

I’m evaluating three lesser-known defence shares worth considering in 2024.

Babcock International

Babcock International (LSE:BAB) provides engineering support and product development for land, marine, nuclear and aviation operations globally. It also builds and decommissions nuclear facilities in the UK, including submarines. As owner and manager of two UK naval bases, it’s well established in the defence sector, providing naval and military support to Ukraine.

With an acceptable balance sheet, I would keep an eye on its debt. With over £1bn in debt and only £354m in equity reported in 2023, its debt-to-equity ratio is high at 2.67. The share price is up 72% this year but fell sharply during Covid and is still down 20% since early 2020. Subsequently, consensus among analysts estimates the shares to be undervalued by 27%. 

I believe the price has good growth potential from here as it’s a reliable stock with strong ties to the global defence industry. 

Serco Group

Serco Group (LSE:SRP) is involved in defence, immigration, transport and justice in the UK and mainland Europe, with additional operations in the Middle East, Australia, Hong Kong and North America. As a designer and producer of critical defence assets, it plays a key role in European defence operations. It also provides engineering, infrastructure support and training to military personnel.

In its 2023 full-year report, revenue was up 7.5% and earnings per share (EPS) up 36%, exceeding analyst expectations. At £1.84, the share price is estimated to be trading at fair value compared to peers and industry.

So why did employees Nigel Crossley and Mark Irwin collectively sell £920k worth of their shares this past week? Possibly because revenue is forecast to decline in the coming years due to government efforts to reduce spending on asylum seekers, combined with the renewal of a five-year Medicare contract.

Subsequently, the forward-looking price-to-earnings (P/E) ratio is 13.5 (up from 9.9), potentially limiting future price growth. Still, there’s general agreement among analysts that the price will increase by around 20% in the coming year. 

QinetiQ

QinetiQ (LSE:QQ.) develops advanced technology to aid military operations. Some of its services include AI, cybersecurity, naval control systems, radar enhancement, robotics, and missile detection.

The share price has been rather subdued lately, down 4.5% in the past year, with profit margins cut in half. In first half 2024 earnings report, EPS missed analyst expectations by 7.6%. With a heavy reliance on government defence spending, any reduction there puts QinetiQ’s profits at risk — particularly considering the highly specific, cutting-edge nature of its products.

But with income and revenue up, the price seems to be lagging behind. Subsequently, QinetiQ shares could be selling cheap at £3.52. Future cash flow analysis estimates a fair price to be more in the range of £6.50. This is backed by forecasts from eight analysts with consensus on a 12-month price target of around £4.33 – a 23% increase.

The post 3 mid-cap UK defence shares to consider buying in 2024 appeared first on The Motley Fool UK.

Today I’m looking at one in particular that has enjoyed consistent growth in the past six months, while many other UK stocks have fallen in the same period.

It may not be a particularly exciting company but it’s a part of the everyday lives of most UK citizens. From defence infrastructure to health services, UK-based Serco Group (LSE:SRP) has its fingers in many pies – both locally and abroad.

But it hasn’t always been plain sailing for the company.

Slow and steady 

The Serco share price has seen very little volatility over the past six months. But a pricing scandal in 2013 battered the share price and threatened the company’s relationship with the UK government. According to reports, Serco – along with fellow service provider G4S – was allegedly overcharging for services related to electronic monitoring.

However, the company resolved the issue and managed to stay afloat. Now, a decade later, it’s gaining traction and being awarded new government contracts. Reports suggest that lessons have been learnt and the firm will endeavour to manage risks more appropriately going forward.

I think this has been reflected in the share price, which has enjoyed 20% growth over the past year. The past six months have been particularly profitable, with the price reaching 179p from a low of 139p in October last year. And with a price-to-earnings (P/E) ratio of 9.3 times, Serco Group is priced considerably lower than the industry average of 15 times.

Risks

Despite the solid performance, analysts aren’t particularly positive about Serco’s future earnings growth. There’s an expectation of around a 10% earnings decline over the next 12 months. This leaves its future return on equity (ROE) estimated to be only 15% in three years.

But that doesn’t necessarily mean the share price will drop. In fact, analysts on average have a price target of 215p in 12 months – a 20% increase from current levels. I would say that’s a fair estimate and in line with the recent boost in performance.

Still, I’m sure lingering concerns remain from the pricing scandal and subsequent fallout. Serco Group may have to work extra hard to fully regain the trust of the UK government and quell investor fears.

My verdict

Look, I’m not going to claim Serco has been anywhere near as profitable as my Rolls-Royce or Meta shares lately. But what I appreciate is that the company has overcome mistakes and learned from the experience. This leaves me with the impression of a more well-established and mature firm.

Unfortunately, the dividend yield is low at only 1.7%. This means it doesn’t provide me with much value beyond stable and reliable growth. However, I believe that’s the importance of a well-diversified portfolio – it should include some stable stocks that sit quietly in the background, providing slow but steady growth.

Serco has served me well so far, so if I didn’t own its shares already, I’d certainly consider adding it to my portfolio now.

The post This reliable FTSE 250 stock has been propping up my portfolio lately. Does it have a promising future? appeared first on The Motley Fool UK.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Assura 

What it does: Assura is a real estate investment trust (REIT) that operates more than 600 primary healthcare properties. 

By Royston Wild. Shares in property stocks like Assura (LSE:AGR) picked up momentum towards the tail end of 2023. They were pushed higher by rising expectations of interest rate cuts kicking off early in the New Year. 

Given the pace at which UK inflation is falling, I think further share price gains could be possible in January. Lower interest rates boost REITs’ net asset values (NAVs) and reduce their borrowing costs. 

Healthcare specialist Assura is in my opinion a great stock to own in these uncertain times. It operates in a rock-solid part of the property market where rents are guaranteed by government bodies. 

Accordingly, City analysts expect earnings here to steadily rise over the short-to-medium term. This also leads to predictions of further solid dividend growth. 

Despite recent share price strength Assura still offers a tasty dividend yield. This sits at 6.6% for this financial year (to March 2024), almost double the average of 3.4% for FTSE 250 shares.

Royston Wild does not own shares in Assura.

RS Group

What it does: RS Group is a British leader in electrical products and services with clients all around the world.

By Oliver Rodzianko. RS Group (LSE:RS1) is my favourite British company I have a stake in. I bought the shares for the first time in October 2023, and they rose 10% in price by mid-December.

I know it may be a rocky road to high profits for my investment, as the shares have been down for some time.

However, it has a 10-year average annual revenue growth rate of around 8.50% and a three-year average of 13%. So, I think this is a value and a growth play in one.

I think the greatest risk here is the patience needed for the shares to turn around. All of the financials are lined up for it to do so, in my opinion. It’s just a matter of holding my nerve.

I think it’s impossible to pick the bottom of a downtrend, so I’m buying more now. Especially with a gross margin of almost 45%!

Oliver Rodzianko owns shares in RS Group

Scottish Mortgage Investment Trust

What it does: Scottish Mortgage Investment Trust aims to identify, own and support the world’s most exceptional growth companies.

By Paul Summers. In contrast to what I expected earlier in the year, shares in FTSE 100-listed investment trust Scottish Mortgage (LSE: SMT) will be ending 2023 on the front foot. 

I now think there could be more to come in January and beyond. This is assuming that nothing comes along to shake the market’s conviction that interest rates will be cut before long. The sort of positions it holds, including those in hard-to-value private companies, are ideal for a risk-on environment.

One other thing worth highlighting is that the portfolio is truly active. In other words, it doesn’t look too similar to any major index. This is important for me considering that the ‘Magnificent Seven’ tech stocks have recovered strongly this year and may moderate in 2024. 

As the icing on the cake, a low management charge of 0.34% is cheaper than some passive funds.

Paul Summers owns shares in Scottish Mortgage Investment Trust

Serco Group

What it does: Serco Group partners with governments around the world to deliver essential public services.

By Charlie Carman. Serco Group (LSE:SRP) is my best British share to buy for January.

Although some investors might be concerned by Serco’s reliance on the public purse, demand for the outsourcer’s services looks robust as we enter the new year.

Immigration remains a pressing priority for European governments. Serco’s already reaping the rewards. Its Justice & Immigration division delivered 88% revenue growth to £621m in the UK and Europe during the first half.

Further expansion could push revenues even higher. The company recently acquired European Homecare, which manages facilities for 36,000 asylum seekers in Germany.

Elevated geopolitical tension is another tailwind. Serco’s defence revenues continue to advance across all geographic markets.

Granted, providing high-profile public services carries reputational risks. Serco shares have never recovered to their former levels after plummeting amid a prisoner tagging scandal in 2013.

Nonetheless, with a forward P/E ratio below 10.5, the risk/reward profile looks attractive to me today.

Charlie Carman does not own shares in Serco Group. 

The post Best British shares to consider buying in January appeared first on The Motley Fool UK.

But is now the time for me to invest? Let’s find out.

Analysts rate the stock

For those unfamiliar with the firm, Serco delivers public services across defence, transport, justice, immigration and healthcare. It operates across Europe, the Americas, Asia Pacific and the Middle East.

Brokers are bullish on the stock. Of the six City analysts covering it, five rate it as a ‘strong buy’. And there’s an average price target of 206p, which is 30% higher than the current share price of 158p.

A strong H1

In August, the firm released a robust set of interim results. Revenue grew 13% year on year to £2.5bn, while operating profit increased by 52% to £187.7m. This was despite weakness in Asia Pacific and the firm losing Covid-related work.

Serco is seeing a boom in demand for its various immigration services, especially in the UK and Europe. These range from border control and detention centres to accommodation and welfare support.

In September 2022, it acquired a business called ORS that enabled it to enter the European immigration services market. Management said this had “traded ahead of expectations with robust underlying demand due to global migration patterns“.

At the end of June, the order book remained high at £14.1bn. And looking to the full year, it expects revenue of at least £4.8bn, 6% more than last year.

Global migration trend

In 2023, the number of people displaced by war and persecution reached a record 108.4m, according to the UN.

Many millions more are moving to seek a higher standard of living or join relatives who’ve already done so. Hence migration to richer countries, which generally have labour shortages, is at an all-time high.

The World Economic Forum says annual net immigration into Europe is projected to increase steadily from current levels until 2036. And according to figures quoted by Zurich Insurance Group, there could be 1.2bn climate refugees worldwide by 2050 if global warming is left unaddressed.

Most governments simply don’t have the resources to deal with this. So they’ll likely need to continue outsourcing services to specialists like Serco. And this should underpin strong long-term growth in its international markets.

Will I buy the stock?

One thing I like here is that the company offers diversity in geography and sectors.

For example, it has a significant contract with the Australian Department of Home Affairs, which was recently extended until December 2024. And it has just won a £200m electronic monitoring contract with the UK Ministry of Justice.

That said, some of the areas in which Serco operates, notably detention centres, can be controversial. And due to this, I’d say there’s more of a risk of negative headlines knocking the share price. It has happened before and is something to bear in mind.

In fact, this may be why the shares are trading cheaply at a forward price-to-earnings (P/E) multiple of 10.6.

But given the growth potential here, I reckon the stock looks undervalued. Additionally, there’s a modest but growing dividend yielding 1.9%.

All things considered, I’m tempted to invest and may do so.

The post This cheap UK stock could rise 30%, the City says appeared first on The Motley Fool UK.

In raising both its annual revenue and profit guidance, the firm highlighted strong demand for immigration services, both in the UK and Europe. It’s also benefiting from international growth in its defence segment.

These would appear to be long-term growth markets for Serco, which has a strong competitive position after operating for decades in many of its markets. Plus, the shares are still relatively inexpensive.

On paper then, this would seem to represent a buying opportunity. But is it?

Strong H1

For the first six months of 2023, the group anticipates revenue increasing 13% year on year to £2.5bn. This includes organic revenue growth of around 6%, with acquisitions contributing 5% and favourable currency movements adding 2%.

It expects underlying trading profit to increase by 8% to at least £140m. This is impressive considering the firm lost its Covid-related work in the first half of last year.

New chief executive Mark Irwin commented: “Governments around the world are increasingly looking to us to help them with the complex and difficult challenges they face and…this is driving growth in a number of areas of our international business and enables us to upgrade our guidance for the year.”

As a result, Serco now expects full-year revenue of £4.8bn, up from its previous expectations of £4.5bn. Meanwhile, annual profit is forecast to be around £245m, which is only 3% higher but still a 4% upgrade to its previous guidance.  

Growing immigration market

Serco is an incredibly well-diversified business, operating across the world in defence, transport, justice, immigration, health, and other citizen services for local and national governments.

Its immigration services includes the management of detention centres, providing housing and welfare support for asylum seekers, as well as issuing identity documents. The company is seeing “robust demand” in this sector in the UK, and it expects this to continue.

In September, Serco acquired a business called ORS in order to enter the European immigration services market. This is a fast-growing market, as last year saw the highest number of migrants entering the European Union since 2015. Trading in this asylum and immigration processing business has been “ahead of expectations with robust underlying demand due to global migration patterns.”

Would I buy?

The stock is cheap, trading on a pre-upgrade price-to-earnings (P/E) ratio of 10.5. Plus, there’s a dividend yielding around 2% that’s covered four times over by earnings. This suggests there’s ample scope to increase the payout moving forward.

One concern I’d highlight is that the company has been involved in a number of scandals in previous years. For example, it overcharged the government for the electronic tagging of offenders. Indeed, it was barred from winning new government contracts for a while.

However, previous chief executive Rupert Soames, who was in charge from 2014 to the beginning of this year, led a successful turnaround. The company seems in much better shape today than it has done for years.

On balance, I think the shares represent good value and I’d probably snap some up if I had money to invest.

The post Up 16% in days! Should I buy Serco Group shares? appeared first on The Motley Fool UK.