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Is Ricardo plc (LON:RCDO) Still A Cheap Service Stock?

Luis Baughman

Ricardo plc (LON:RCDO), a UK£442.2m small-cap, operates in the professional services industry, which generally follows the ups and downs of the economic cycle, as its services cater to various industries across different sectors. Professional services analysts are forecasting for the entire industry, a relatively muted growth of 9.7% in the upcoming year , and a whopping growth of 33.0% over the next couple of years. However this rate still came in below the growth rate of the UK stock market as a whole. Today, I will analyse the industry outlook, and also determine whether Ricardo is a laggard or leader relative to its service sector peers.

See our latest analysis for Ricardo

What’s the catalyst for Ricardo’s sector growth?

LSE:RCDO Past Future Earnings September 13th 18

High market competition, predominantly from new entrants into the service industry, has led to a faster-changing business environment. In the past year, the industry delivered growth in the teens, beating the UK market growth of 15.2%. Ricardo lags the pack with its negative growth rate of -2.4% over the past year, which indicates the company has been growing at a slower pace than its professional services peers. Although Ricardo is poised to deliver a 4.1% growth next year, moving it from negative to positive territory, it still lags its industry average rate of growth of 9.7%.

Is Ricardo and the sector relatively cheap?

LSE:RCDO PE PEG Gauge September 13th 18

The professional services sector’s PE is currently hovering around 17.42x, in-line with the UK stock market PE of 17.03x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 22.0% compared to the market’s 12.4%, potentially illustrative of past tailwinds. On the stock-level, Ricardo is trading at a PE ratio of 18.23x, which is relatively in-line with the average professional services stock. In terms of returns, Ricardo generated 14.8% in the past year, which is 7.2% below the professional services sector.

Next Steps:

If Ricardo has been on your watchlist for a while, now may not be the best time to enter into the stock. The company is a professional services industry laggard in terms of its future growth outlook, and is trading relatively in-line with its peers. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the services sector. However, before you make a decision on the stock, I suggest you look at Ricardo’s fundamentals in order to build a holistic investment thesis.

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Historical Track Record: What has RCDO’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Ricardo? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.