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Serco Group plc (SRP): Now Looks To Be A Good Time To Buy

LONDON — I’m always searching for shares that can help ordinary investors like you make money from the stock market.

So, right now, I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I’m hoping to pinpoint the very best buying opportunities in today’s uncertain market.

Today I am looking at Serco Group plc (LON:SRP) to determine whether you should consider buying the shares at 610p.

I am assessing each company on several ratios:

Price-to-earnings (P/E): Does the share look good value when compared against its competitors?

Price/earnings growth (PEG): Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend cover: Is the dividend sustainable?

So let’s look at the numbers:

Stock Price 3-yr EPS growth Projected P/E PEG Yield 3-yr dividend growth Dividend cover
Serco Group 610p 55% 14 2.8 1.7% 37% 4.2

The consensus analyst estimate for next year’s earnings per share is 43.6p (5% growth) and dividend per share is 11.7p (16% growth).

Trading on a projected P/E of 14, Serco Group plc (LON:SRP) appears cheaper than its peers in the support services sector, which are currently trading on an average P/E of around 19.

Serco Group plc (LON:SRP)’s P/E and steady growth rate give a PEG ratio of around 2.7, which implies the share price is expensive for the near-term earnings growth the firm is expected to produce.

Offering a 1.7% yield, Serco Group plc (LON:SRP)’s dividend yield is below the sector average of 2.2. However, Serco has a three-year compounded dividend growth rate of 37%, implying the yield could soon catch up to that of its peers.

Indeed, the dividend is more than four times covered by earnings, giving Serco plenty room for further payout growth.

So, is now the time to buy Serco?
Serco is a leading international service company that delivers essential services for organisations around the world, such as, traffic management systems, software support for government agencies and the operation of London’s docklands light railway.

Like its peer, Capita Group, Serco Group plc (LON:SRP)’s services have been in demand over the past few years, as organisations have turned to the company, trying to reduce their costs by outsourcing operations.

Indeed, thanks to this switch to outsourcing, 2012 was a record year for Serco as the company won £5.8bn in new contracts, and profits jumped by 27%.

Furthermore, many City analysts believe that the company’s growth is set to continue over the next few years, with analysts predicting that the company’s earnings will grow 5% this year, and 10% in 2014.

Additionally, it appears that the company is on-track to achieve these lofty growth targets because, at the end of December 2012, the company’s order pipeline stood at just over £19bn, and the company had revenue visibility of 92% for 2013, and 79% for 2014 — indicating that the company has confirmed the majority of its revenue for the next two years.

So, overall, based on Serco’s steady rate of historic growth, strong bid pipeline, and current discount to sector peers, I feel that now looks to be a good time to buy Serco at 610p.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

The article Is Now the Time to Buy Serco Group? originally appeared on Fool.com.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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