Is SThree (LSE: STEM) one of the best bargain stocks out there?
Its forward price-to-earnings ratio of 17 times could be considered good value by many, given the ripping rate at which earnings have been growing. Both revenues and profits hit fresh record highs in the last financial year (to November 2019).
It looked certain that SThree would make further progress in financial 2020, too. Sure, the toughening macroeconomic landscape might damage broader labour market conditions in the FTSE 250 company’s global territories. But its focus on niche, or STEM (shorthand for science, technology, engineering, and mathematics), industries would give it an extra layer of support.
Nicht so gut
However, it looks as the coronavirus crisis could blow SThree’s trajectory off course.
The company itself commented in March that the challenges facing the labour market are “potentially very significant… given the fast-developing situation with Covid-19, recent large falls in oil prices, and increasing concerns about global confidence and GDP growth”.
Given the chilling employment data from some of SThree’s markets, this isn’t a surprise . Let’s take Germany as an example, its single largest territory and responsible for just under a third of group revenues.
Unemployment in Europe’s largest economy continues to rocket. At 6.3% for May, it was up half a percentage point from the previous month. And the figure would have been a lot worse had the German government not have introduced the Kurzarbeit work scheme.
Similar to the furlough scheme here in Britain, the programme tops up the pay packets of employees put on reduced hours by their employers, lessening the financial strain on companies and thus reducing their need to axe workers.
The German government expects the number of citizens relying on the support scheme to explode, too. As many as 2.1m people are predicted to apply for assistance, dwarfing the 1.4m that required help during the 2008–09 financial crisis.
Will this bargain stock weather the storm?
Could SThree, however, be able to absorb the worst of what the global economic downturn has to offer? Well the company itself believes that the niche industries it serves could save its bacon.
In March’s release it said that “the need for STEM skills going forward should not be underestimated” as major issues like climate change and significant demographic shifts remain in the spotlight. And many of these challenges “[create] a huge opportunity as many of those skills, while still in high demand, are also in short supply, irrespective of where we are in terms of economic cycle”.
SThree doesn’t operate in a bubble and revenues will take a smack given the scale of the Covid-19 hangover. I reckon recent share price weakness reflects its rising risks. And it has a robust balance sheet to help it navigate any choppy waters.
This is share whose appealing long-term investment case remains intact. And I reckon the recent stock market crash makes it a bargain stock worthy of buying.
