CropLogic Limited (ASX:CLI), a AUDA$12.99M 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. The professional service industry also depends on the activities of construction, financial and mining sectors as these create a large portion of its revenues. Professional services analysts are forecasting for the entire industry, an extremely robust growth of 44.28% in the upcoming year , and a whopping triple-digit earnings growth over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the Australian stock market as a whole. Is now the right time to pick up some shares in professional services companies? Today, I will analyse the industry outlook, and also determine whether CLI is a laggard or leader relative to its service sector peers. Check out our latest analysis for CropLogic
What’s the catalyst for CLI’s sector growth?
Business conditions are changing quickly for the service industry, with increased market competition primarily from new entrants entering into the space. Given activities are primarily project-based, the performance of the industry depends on the activities of other sectors. Over the past year, the industry saw negative growth of -12.07%, underperforming the Australian market growth of 5.37%. Given the lack of analyst consensus in CLI’s outlook, we could potentially assume the stock’s growth rate broadly follows its professional services industry peers. This means it is an attractive growth stock relative to the wider Australian stock market.
Is CLI and the sector relatively cheap?
The professional services industry is trading at a PE ratio of 20x, relatively similar to the rest of the Australian stock market PE of 17x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 16.08% compared to the market’s 11.92%, potentially illustrative of past tailwinds. Since CLI’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge CLI’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Professional services stocks are currently expected to grow faster than the average stock on the index. This means if you’re overweight in this sector, your portfolio will be tilted towards high-growth. The industry is trading relatively in-line with the market, which means you may be paying a fair value for the services stocks should you wish to accumulate more of your holdings.
Are you a potential investor? If you’ve been keeping an eye on the professional services sector, now is the right time to dive deeper into the stock-level. The high growth prospect makes stocks such as CLI a more appealing investment case, though the industry is trading relatively in-line with the rest of the wider marker. I suggest you examine the stock’s fundamentals, such as its financial health, before you make an investment decision.
For a deeper dive into CropLogic’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other service stocks instead? Use our free playform to see my list of over 100 other service companies trading on the market.