Key points:
- The Serco share price surged 9.76% after raising its full-year guidance.
- The government contractor has a dull but very profitable business.
- However, I would not buy Serco shares at current prices. Here’s why.
The Serco share price surged by 9.76% after the government and defence contractor issued an unscheduled trading update raising its full-year revenue and profit guidelines. Of course, not every day do we get to write some exciting news about a government contractor such as Serco Group plc (LON: SRP), but today is such a day.
Also read: The Best Shares To Buy Now.
The company told investors that it now expects to generate between £4.3bn and £4.4bn during 2022, with underlying profits of approximately £225 million. The company’s underlying profits guidance has improved from the initial estimate by about £30 million.
Investors cheered that despite losing its COVID-19 Trace & Track contract with the UK government, Serco confirmed other sectors of its British business had witnessed growth. Hence, it expects its UK revenues to fall by 5% and be above £1 billion.
Serco’s update was based on trading during the first four months of the year, which has necessitated the updated forecasts as trading during the second half also promises to be better than initially expected.
The company expects to lose at least £260 million in revenues from cancelling its UK Track & trace contract. Still, it expects to make up for the lost revenues in other sectors, including its immigration business and activities in other regions.
Serco is in other countries in the Middle East, Australia, and North America. The company said that its business in these international markets was improving as it generates more revenues from defence and immigration contracts and the transport sector despite losing its Dubai Metro contract.
While Serco might not be an exciting growth stock, the company’s shares have risen 24.1% in 2022, and the latest announcement is likely to fuel a much bigger rally.
However, I wouldn’t rush to buy Serco at current prices since its shares are trading near their February 2020 highs; we will likely get a pullback than a rally at these levels. Nevertheless, since it never pays to chase a stock higher, I would consider buying Serco stock after a significant pullback.
*This is not investment advice. Always do your due diligence before making investment decisions.
Serco share price
The Serco share price surged 9.76% to trade at 168.00p, rising from Wednesday’s closing price of 153.05p.