FTSE 100 quality assurance services provider Intertek (LSE: ITRK) has just released a bullish trading update. The company had a “strong” start to the year with like-for-like revenue growth of 7% “slightly ahead of expectations”.
Chief executive Andre Lacroix said there was a robust recovery in the firm’s consumer products category. Also, increased demand for assurance, testing, inspection and certification (ATIC) solutions helped to drive progress across the other areas of the business.
Accelerating performance
The company’s recent acquisitions “are performing well”, and Lacroix reckons they target scale-up opportunities within the global network of the business. The enterprise plans to invest further for organic and acquisitive expansion in “high-growth and high-margin” segments of the market.
Also, there was “robust” profit margin progression and “strong” free cash flow during the first four months of the year.
All of that was no accident, Lacroix reckons. Pricing initiatives, operating leverage, cost and productivity improvements all helped to drive the improvements.
The balance sheet looks stable here, with just modest levels of net debt. It works with the free cash flowing into the business to provide the means for further investment to “accelerate performance”.
Intertek, meanwhile, scores well against indicators for the quality of a business. For example, the operating margin is running above 14% and the return on capital is around 19%.
That contrasts with a lower-margin and arguably lesser-quality business like Tesco, at around 4% and 8% respectively.
However, good quality metrics are no guarantee of a decent long-term investment outcome for shareholders.
Earnings wobbled in 2020 and City analysts predict an almost 15% decline this year despite revenue growth.
Recovery and growth potential
Meanwhile, near 5,050p, the share price is still below its level of six years ago – well before the pandemic.
One of the risks is the valuation may contract further. After all, with the volatility over the past few years, the compound annual growth rate for earnings is running at just 6.7%, or so.
That’s not bad, but it’s not zippy progress like the kind of double-digit annual percentage earnings gains we see with some of the fastest-growing businesses.
However, the forward-looking price-to-earnings ratio for 2025 is just below 20 for 2025. That compares to the FTSE 100’s rating of just over 14.
I’d say the firm’s valuation looks quite full and well up with events.
Nevertheless, Lacroix reckons the company’s clients are increasing their focus on risk-based quality assurance. They want to operate with higher standards on quality, safety and sustainability in each part of their value chain.
The implication – as I see it – is that Intertek has recovery as well as growth potential. Lacroix reckons the firm’s on track to return to its peak margin of 17.5% “and beyond” in the medium term.
City analysts have pencilled in an almost-9% rebound in earnings for 2025 with robust, double-digit percentage advances in the shareholder dividend this year and next. Meanwhile, the forward-looking yield is running at just over 3% — handy income for shareholders to collect.
I’m not expecting the share price to explode higher anytime soon. But I do think the stock is worth deeper research with a view to adding it to a diversified portfolio to hold long term.
The post The FTSE 100’s Intertek delivers a bullish update — can the share price soar? appeared first on The Motley Fool UK.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Intertek Group Plc and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore 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.
