As the Capita (LSE: CPI) share price continues to tumble, is there a bargain to be had or should I steer clear? Let’s dig deeper.
Outsourcing services
Capita is one of the largest outsourcing businesses in the country. It helps public and private sector businesses with their operations across a range of tasks and duties.
As I write, Capita shares are trading for 18p. They’re currently trading at all-time lows! Over a 12-month period, they’re down 35%, from 28p at this time last year to current levels. Looking back further, over a five-year period they’re down 83%, from 112p to current levels.
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I reckon Capita shares have struggled in recent years due to declining performance financially, as well as contracts being harder to come by. Plus, rising debt levels have concerned investors around the firm’s balance sheet. On top of that, a data breach last year didn’t help.
However, an announcement to cut 900 jobs and review around the overall strategy and direction of the business could set it on a better course ahead.
To buy or not to buy?
The Capita share price dropped sharply when the news of the data breach broke. Plus, it could present challenges winning contracts moving forward too as its reputation will have been harmed. The news last month that 5,000 pension holders will be suing Capita due to retirement savings data being hacked won’t help investor sentiment. A hefty financial penalty could be on the way too.
Next, the sheer size of Capita is astounding, with over 43,000 colleagues. No wonder it’s hard to keep an eye on efficiencies, and I’m not sure 900 job cuts will be the end to help drive improvements in this area.
However, it’s worth mentioning that Capita has still been performing well recently. A pre-close update for the 11 months ended 30 November released just before Christmas made for good reading. Revenue grew by 2.1% and new contract wins increased by 47% compared to the previous year. Margin levels also look to be increasing.
Moving on, what I personally like about Capita’s business model is its exposure to the public sector, where it makes half of its revenue. Usually, contracts with central and local governments are longer-term and can provide stable income streams. The private sector is not as secure, or long-term, generally speaking.
Finally, Capita’s current valuation on a price-to-earnings ratio of just three makes the shares look dirt-cheap, at least on the surface of things.
My verdict
Despite Capita trading on a rock-bottom valuation, and its most recent update showing promise, I’m not going to buy any shares today.
At present, the uncertainty around what efficiencies will look like and how they could impact Capita is putting me off investing. I need to see more results and updates before I decide to part with my hard-earned money. Plus the data breach in March last year is a huge red flag for me. Failures like these can have a lasting impact on current sentiment, and future prospects too.
To me, Capita shares don’t represent value for money just now. I reckon there are better stocks out there for my portfolio. Capita’s next update is due in early March and I’ll revisit my position at that time.
