Every now and again I’m thankful for those hidden mid-cap FTSE 250 gems that keep my portfolio afloat through tough times. They might not make the impressive gains of some larger-cap companies but they lack the nerve-wracking unpredictability of more volatile stocks.
Today I’m looking at one in particular that has enjoyed consistent growth in the past six months, while many other UK stocks have fallen in the same period.
It may not be a particularly exciting company but it’s a part of the everyday lives of most UK citizens. From defence infrastructure to health services, UK-based Serco Group (LSE:SRP) has its fingers in many pies – both locally and abroad.
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But it hasn’t always been plain sailing for the company.
Slow and steady
The Serco share price has seen very little volatility over the past six months. But a pricing scandal in 2013 battered the share price and threatened the company’s relationship with the UK government. According to reports, Serco – along with fellow service provider G4S – was allegedly overcharging for services related to electronic monitoring.
However, the company resolved the issue and managed to stay afloat. Now, a decade later, it’s gaining traction and being awarded new government contracts. Reports suggest that lessons have been learnt and the firm will endeavour to manage risks more appropriately going forward.
I think this has been reflected in the share price, which has enjoyed 20% growth over the past year. The past six months have been particularly profitable, with the price reaching 179p from a low of 139p in October last year. And with a price-to-earnings (P/E) ratio of 9.3 times, Serco Group is priced considerably lower than the industry average of 15 times.
Risks
Despite the solid performance, analysts aren’t particularly positive about Serco’s future earnings growth. There’s an expectation of around a 10% earnings decline over the next 12 months. This leaves its future return on equity (ROE) estimated to be only 15% in three years.
But that doesn’t necessarily mean the share price will drop. In fact, analysts on average have a price target of 215p in 12 months – a 20% increase from current levels. I would say that’s a fair estimate and in line with the recent boost in performance.
Still, I’m sure lingering concerns remain from the pricing scandal and subsequent fallout. Serco Group may have to work extra hard to fully regain the trust of the UK government and quell investor fears.
My verdict
Look, I’m not going to claim Serco has been anywhere near as profitable as my Rolls-Royce or Meta shares lately. But what I appreciate is that the company has overcome mistakes and learned from the experience. This leaves me with the impression of a more well-established and mature firm.
Unfortunately, the dividend yield is low at only 1.7%. This means it doesn’t provide me with much value beyond stable and reliable growth. However, I believe that’s the importance of a well-diversified portfolio – it should include some stable stocks that sit quietly in the background, providing slow but steady growth.
Serco has served me well so far, so if I didn’t own its shares already, I’d certainly consider adding it to my portfolio now.
