Like billionaire investor Warren Buffett, I am always looking for the best value stocks to buy. And Head (LSE:CPI) – whose share price rose sharply on Tuesday (July 9) – appears to be a bargain based on current earnings estimates.
The outsourcing giant has soared in value following the announcement of a transformative asset sale. But at 18.8p per share, it still trades on a price-to-earnings (P/E) ratio of 6.4, which is at record lows.
So should I add the shares to my portfolio today?
Big sale
The small-cap company offers a wide range of outsourcing and professional services to the private and public sectors. These services include operating call centers, performing human resources and accounting functions, providing software and IT infrastructure, and providing business consulting.
The company’s share price rose sharply on Tuesday after the company announced the sale of its software business Capita One for £207 million. The division provides local authorities and housing associations with the tools to maximise their revenues and reduce their running costs.
The sale to MRI Software The transaction is expected to close at the end of August, after Capita will receive a dividend of £4.8 million from Capita One.
Capita said the disposal “follows an evaluation of certain activities… that are not core to the Group’s future strategy“This includes standalone software services, such as those provided by the soon-to-be-sold unit.
Under pressure
The sale will significantly improve the balance sheet and help it better achieve its revised growth targets. The company – with a market capitalisation of £316 million – had net debt of £545.5 million in December.
Capita has been a disaster area for investors over the last decade, with the share price plummeting by 98% during that time. After the Covid-19 outbreak, the share price collapsed and was unable to regain its previous highs.
The company has fallen victim to rising costs as it has grown larger and increasingly inefficient. Last March, it was also the victim of a massive cyberattack in which hackers stole customer data from around 90 companies.
The attack not only caused reputational damage, but also incurred costs of £25 million, pushing Capita even further into the red. On a pre-tax basis, the company swung into a loss of £106.6 million in 2023, after making a profit of £61.4 million the previous year.
High risk
Last year’s rude awakening prompted the group to embark on a massive transformation programme. In March it set a cost-cutting target of £100m and last month it announced a major restructuring that will focus on areas such as public services and call centres.
According to broker forecasts, these moves could make the company one of the hottest growth stocks on the London Stock Exchange, with earnings expected to rise 74% year-on-year in 2024, with gains of 33% and 23% expected in 2025 and 2026, respectively.
However, these electrifying estimates do not convince me. And neither does the market, which in turn explains the low valuation of Capita shares.
The fact that revenue fell by 9% between January and April due to contract losses and weaker contract activity is not a good sign. The consequences of last year’s data breach could be significant. And there is still a lot of uncertainty about Capita’s transformation plan.
All in all, I would rather look for other value stocks to buy at the moment.
The post Capita’s share price jumps 20% after asset sale! Time to buy? appeared first on The Motley Fool UK.
Further reading
Royston Wild does not own any of the stocks mentioned. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article about the companies mentioned in this article are those of the author and as such may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.
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