XPS Pensions Group (LSE:XPS) is a new addition to the FTSE 250, having joined the index a couple of months ago. But investors who knew about it in 2019 could have done incredibly well.
Over the last five years, the stock has gone from £1.18 per share to £3.60. And with the company still posting impressive results, there could well be more to come.
What does the company do?
As its name suggests, XPS specialises in pensions consulting. This includes helping companies stay ahead of changes in regulation as well as providing investment advice.
Itâs very much the opposite of semiconductor design. But itâs an important industry that requires specialist understanding and the need for this is unlikely to go away any time soon.
Five years ago, £10,000 would have bought me 8,474 shares in the company. At todayâs prices, that would have a market value of £30,508.
In that time, revenues have almost doubled, but wider operating margin means profits have grown much faster. So I think this is definitely worth a closer look.
A people business
With consultancy companies, their people are their most important asset. There are advantages to this, but there are also drawbacks.
On the positive side, XPS doesnât have much in the way of machinery or equipment. Thatâs a positive â those things need maintenance and repair in ways that people donât.
The downside is people can go off and set up rival operations in ways that machines canât. To limit that risk, firms need to keep paying their staff well â but thatâs expensive for shareholders.
XPS has been doing this by paying employees using equity. But that has caused the share count to more than double since 2016, diluting the value of each share outstanding by around 56%.
Is it worth it?
Issuing additional shares is how XPS invests in itself, but the big question is whether or not the company gets a good return on that investment. And the recent evidence is encouraging.
Over the last five years, operating profits have increased by 250%, while the share count has grown by 2.5%. The additional profits have clearly been worth the dilution.
Factoring in the increase in the number of shares outstanding, operating profits have grown at almost 15% per year since 2019. By any standards, thatâs a strong result.
Investors will want to make sure the increases keep coming â if the growth rate slows, the equation becomes much less attractive. But I think it has been a clear success recently.
A stock to consider buying
The risk of the XPS Pension Groupâs staff using their industry knowledge to set up a rival firm canât be ignored. But the company has strong customer relationships that help limit this.
I think the stock is one investors should consider. If profit growth can keep outpacing the increase in shares outstanding, shareholders should continue to benefit as a result.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Xps Pensions Group 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.
