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From time to time I'm grateful for those hidden mid-caps. FTSE 250 gems that keep my wallet afloat in difficult times. They may not reap the impressive profits 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 steady growth over the last six months, while many other UK stocks have fallen in the same period.
It may not be a particularly exciting undertaking, but it is part of the daily lives of most UK citizens. From defense infrastructure to healthcare, based in the UK Serco Group (LSE:SRP) has its hands in many matters, both locally and abroad.
But it hasn't always been easy for the company.
Slow but safe
Serco's share price has seen very little volatility over the last six months. But a pricing scandal in 2013 hit the share price and threatened the company's relationship with the UK government. Serco – together with fellow service provider G4S – was allegedly overcharging for services related to electronic monitoring.
However, the company solved the problem and managed to stay afloat. Now, a decade later, it is gaining traction and winning new government contracts. Reports suggest that lessons have been learned and the company will strive to manage risks more appropriately in the future.
I think this has been reflected in the share price, which has enjoyed 20% growth over the past year. The last 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 strong performance, analysts are not particularly positive about Serco's future earnings growth. Profits are expected to fall by around 10% over the next 12 months. This leaves its estimated future return on equity (ROE) at just 15% in three years.
But that doesn't necessarily mean the stock price will go down. In fact, analysts on average have a 12-month price target of 215p, a 20% increase from current levels. I would say that is a fair estimate and is in line with the recent performance increase.
Still, I'm sure concerns about the pricing scandal and its subsequent fallout remain. Serco Group may have to work harder to fully regain the trust of the UK government and calm investor fears.
my verdict
Look, I'm not going to claim that Serco has been as profitable as my Rolls-Royce either Goal actions lately. But what I am grateful for is that the company has overcome its mistakes and learned from the experience. This gives me the impression of being a more consolidated and mature company.
Unfortunately, the dividend yield is low, only 1.7%. This means it doesn't bring me much value beyond stable, reliable growth. However, I think 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 already own its shares, I would certainly consider adding it to my portfolio now.
