Here's Why I Think Serco Group (LON:SRP) Is An Interesting Stock

By
Simply Wall St
Published
November 15, 2021
LSE:SRP
Source: Shutterstock

Like a puppy chasing its tail, some new investors often chase 'the next big thing', even if that means buying 'story stocks' without revenue, let alone profit. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

So if you're like me, you might be more interested in profitable, growing companies, like Serco Group (LON:SRP). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

View our latest analysis for Serco Group

How Fast Is Serco Group Growing Its Earnings Per Share?

Over the last three years, Serco Group has grown earnings per share (EPS) like young bamboo after rain; fast, and from a low base. So I don't think the percent growth rate is particularly meaningful. Thus, it makes sense to focus on more recent growth rates, instead. Like the last firework on New Year's Eve accelerating into the sky, Serco Group's EPS shot from UK£0.10 to UK£0.25, over the last year. You don't see 149% year-on-year growth like that, very often.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). While we note Serco Group's EBIT margins were flat over the last year, revenue grew by a solid 18% to UK£4.2b. That's a real positive.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

earnings-and-revenue-history
LSE:SRP Earnings and Revenue History November 16th 2021

Of course the knack is to find stocks that have their best days in the future, not in the past. You could base your opinion on past performance, of course, but you may also want to check this interactive graph of professional analyst EPS forecasts for Serco Group.

Are Serco Group Insiders Aligned With All Shareholders?

Like the kids in the streets standing up for their beliefs, insider share purchases give me reason to believe in a brighter future. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

We haven't seen any insiders selling Serco Group shares, in the last year. With that in mind, it's heartening that Roy Gardner, the of the company, paid UK£29k for shares at around UK£1.17 each.

Does Serco Group Deserve A Spot On Your Watchlist?

Serco Group's earnings per share have taken off like a rocket aimed right at the moon. If you're like me, you'll find it hard to ignore that sort of explosive EPS growth. And indeed, it could be a sign that the business is at an inflection point. For me, this situation certainly piques my interest. What about risks? Every company has them, and we've spotted 2 warning signs for Serco Group (of which 1 is a bit unpleasant!) you should know about.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of Serco Group, you'll probably love this free list of growing companies that insiders are buying.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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