Is FTSE 100 stalwart Capita good value?
- growth in earnings, and;
- an upwards P/E re-rating.
Seeking steady growth
Not all companies achieve steady earnings growth as you can see by the aggregate performance of those in London's premier FTSE 100 index, where the compound annual growth rate over the last five years has been just 0.7%:
|Year to June||2007||2008||2009||2010||2011||2012|
|FTSE 100 index||6608||5626||4249||4917||5946||5571|
|Aggregate earnings per share||537||503||427||397||527||557|
One contender is Capita , which is an outsourcing specialists working for public and private sector organisations. This table summarises the company's recent financial record:
|Adjusted earnings per share||28.1p||33.26p||38.75p||44.98p||48.49p|
Earnings have grown at an equivalent 14.6% compound annual growth rate putting Capita in the Stalwart category.
Capita specialises in sorting out, and running, its clients' businesses. I like to think of the process of managing an enterprise, or organisation, as comprising two parts: strategic decision-making and execution. So often, the execution element is lacking. Capita has enjoyed considerable success, since its establishment in 1987, offering execution skills to organisations.
So, clients outsource 'non-core' functions to Capita, like administration, ICT, HR and payroll, strategic development, and business process engineering. Capita then either takes the work directly, or comes into the organisation to introduce new, and better, systems and processes, and to train the client's staff to use them.
Mainly active in the UK, Capita reckons it's the market leader in Business Process Outsourcing (BPO) with a 23% market share. I like the way the company analyses its revenue according to market segment. Currently, the firm derives 20% of revenue from local government, 15% from health, 13% from education, 10% from central government, 8% from insurance, 7% from life and pensions, 4% from financial services, 3% from transport and 20% from other businesses in the private sector. So, well over half of revenues are from the public sector.
Capita pursues growth both organically and through acquisition.
I analyse five indicators to determine whether earnings growth can continue and if the shares offer good value:
Although the outlook and recent trading are both positive, Capita's cash flow has been feeling the squeeze due to demands made from working capital. This appears to be due to tough economic conditions affecting its clients' ability to pay quickly for services received. There's also a fair bit of debt on the balance sheet due to past acquisition activity.
Right now, forecast earnings growth is 7% for 2013, and the forward P/E ratio is around 13 with the shares at 730p. Considering that and the other factors analysed in this article, I think the firm is a good candidate for my watch list.
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