Wednesday 14 January 2015

BUY: Interserve--The irrationality of the market?

Price: 534.88
Shares: 93 (this transaction) and 180 (entire holding)
Predicted annual dividend income: £21.55 (this transaction) and £41.71 (entire holding)

I have been watching Interserve carefully since I added it to my portfolio back in September. In general (except for a short spell in November) it has been trading below my original 627p per share price.

However, I was not moved enough to top up my holding as the discount was minimal in most cases and the investment case for others was more compelling.

However, since the start of the year the price has continued to drop to nearly 100p less than I originally paid for it. But why? As far as I could gather, for no substantial reason whatsoever. As a consequence, I decided to average down my holding in this mid-cap services company.

Value ratings on the up

For a start it is clear that the analysts have not lost confidence in the company's ability to sustain high levels of growth. For this year they anticipate these figures:

EPSP/E Ratio
Difference (%)2.75

This shows that, in fact, the consensus analyst prediction for EPS has actually grown since September from 55.34p. Not a massive jump maybe. But not something you would expect to create a situation in which the share price should decline so heavily.

For the year after things are a little different, however:

EPSP/E Ratio
Difference (%)10.93

Now, here the analysts have lowered their consensus predictions a little from the 65.28p predictions in September. However, is it enough to justify the price decline? I don't think so. 

Certainly even with these lower predictions plugged in we see an EPS growth of about 17% this year and 14% next year being presumed. That is a very hefty growth indeed even if the revision trend is down somewhat. This means that--with the share price drops as well--we have PEG ratios of about 0.5 for both years. This still seems excellent value to me.

Dividends also growing

As mentioned when I originally bought into Interserve. They had a superb dividend growth record. This seems set to continue but with the price drops we find the yield has grown to a very nice figure indeed.

Currently the predictions for the dividend this year and next is 23.17p and 24.14p. Now again these are lower than in September. However, they still churn out an excellent 4.3% and 4.5%. 

Again, as in September these dividends are very well covered for both years at around 2.5 times earnings. 

Time for a top up

The company also announced earlier this month that they anticipated to "perform in-line with expectations" for the whole year. As a consequence of all this, I am very happy to top up on a company I think seems to have been unfairly punished by the market. They are a rapidly growing mid-cap with a solid, well-covered dividend and very able management who have proven effective at using acquisitions to support organic growth.

Fitting into my goals

Clearly, just as originally, Interserve fits very nicely into my goals for this year. The higher anticipated yield should positively contribute to my aim of a portfolio yield of 4% or more. What is more, the £21 added to my dividend income this year will be useful in getting me to my £800 target for the year.

Similarly, the Beta of 0.46 will help me achieve a volatility of less than 0.85 despite the fact that this has risen since the September figure of 0.29.

As with my original purchase. I am quite happy with this top up. I expect Interserve's growth story--despite being in an intensely competitive industry--is far from over. I look forward to seeing it unfold.

[[Creative Commons image reproduced from Flickr user Graham Richardson]]

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