Why Serco Group plc (LSE:SRP) Could Be A Buy
Serco Group plc (LSE:SRP), a commercial services and supplies company based in United Kingdom, saw significant share price volatility over the past couple of months on the LSE, rising to the highs of £1.19 and falling to the lows of £0.96. This high level of volatility gives investors the opportunity to enter into the stock, and potentially buy at an artificially low price. A question to answer is whether SRP’s current trading price of £0.96 reflective of the actual value of the small-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at SRP’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change. View our latest analysis for Serco Group
Is SRP still cheap?
According to my relative valuation model, SRP seems to be currently fairly priced. I’ve used the price-to-book ratio in this instance because there’s not enough visibility to forecast its cash flows, and its earnings doesn’t seem to reflect its true value. The stock’s ratio of 3.9x is currently trading slightly above its industry peers’ ratio of 3.6x, which means if you buy SRP today, you’d be paying a relatively fair price for it. And if you believe SRP should be trading in this range, then there isn’t really any room for the share price grow beyond what it’s currently trading. Although, there may be an opportunity to buy in the future. This is because SRP’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, SRP’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.
Can we expect growth from SRP?
Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at SRP future expectations. SRP’s revenue growth are expected to be in the teens in the upcoming years, indicating a solid future ahead. Unless expenses grow at the same level, or higher, this top-line growth should lead to robust cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? SRP’s optimistic future growth appears to have been factored into the current share price, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the track record of its management team. Have these factors changed since the last time you looked at SRP? Will you have enough conviction to buy should the price fluctuates below the true value?
Are you a potential investor? If you’ve been keeping tabs on SRP, now may not be the most advantageous time to buy, given it is trading around its fair value. However, the optimistic prospect is encouraging for SRP, which means it’s worth diving deeper into other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Serco Group. You can find everything you need to know about SRP in the latest infographic research report. If you are no longer interested in Serco Group, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see pass 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.
