Trimming the fat is not enough

CAPITA yesterday said the conditions for outsourcing were proving “increasingly buoyant”. Such confidence should have had investors piling into the stock, especially as earnings per share were up 12 per cent and contract wins were double the same period last year at £1.1bn. The companies it signed major deals with in the first six months – MetLife, Zurich and the DVLA – read like a who’s who of private sector blue chips and big-spending government agencies. Investors weren’t impressed however; the stock closed down 1.6 per cent at 686p, having touched lows of 657.5p earlier in the session.

Because the truth is things are far from buoyant. Earnings were boosted mainly because of efficiencies – which pushed the operating margin up 70 basis points to 13.8 per cent – and acquisitions. Still, it is hardly unsurprising that an outsourcer has managed to trim the fat – that is, after all, Capita’s stock and trade.

What investors were desperate for was a sign of when the firm expected to return to organic growth, of which there was none. Collins Stewart thinks shareholders will have to wait until 2012. Until such times, the stock deserves to trade at five per cent discount to the sector.