Should I Buy Capita?

LONDON -- Wow, isn't Capita  (LSE: CPI  ) getting pricey? The outsourcing giant is now up more than 50% since hitting a 52-week low of around 6 pounds in May last year, to 9.22 pounds. Is now the time to buy it, in the hope of further fun to come? Or have I left it too late?

Recent share price growth is largely down to a strong 2012, with underlying revenues up 14% to 3.35 billion pounds and operating profit and profits before tax and earnings per share (EPS) all up a neat 10%. Free cash flow more than doubled to 316 million pounds. Organic growth recovered after falling 7% in 2011, to grow 3%. Better still, 2012 was a record sales year, with 4 billion pounds of contract wins, double the figure for 2011. Of these, 90% were new, while just 10% were extensions. Capita's win rate was better than one in two. It also bagged its largest ever contract, Staffordshire county council, worth 1.7 billion pounds over 20 years. The dividend was also hiked by a neat 10%, to 23.5 pence. No wonder investors have been bidding the price up.

I've only recently paid attention to FTSE 100 outsourcing giants such as Capita, Bunzl, and Serco and I like what I see (let's brush over G4S). The sector offers boundless opportunities, with so many private and public sector organizations out there, so long as the fashion for outsourcing persists. If Capita does hit a growth wall in the U.K., there are even more opportunities overseas. Capita is already exploring them, notably in Poland and India, although I would like to see more, given the strong profits many FTSE 100 companies are now banking from emerging markets. Capita does much of its work for U.K. central and local government, which could be a double-edged sword, with spending cuts both threatening revenues but also throwing up new outsourcing opportunities.

Capita investment
Capita's recent sales and operational performance has been strong. Better still, its 5.2 billion-pound bid pipeline is freshly replenished, giving investors a positive long-term earnings stream. Unfortunately, you have to pay for it. Capita now trades at 17.3 times earnings, up from just under 15 times earnings a couple of months ago. That looks pricey against the FTSE 100 average of 14.3 times, but cheaper than the support services sector as a whole, which trades at 19.9.

Capita yields 2.6% (against 3.4% for the index and 2.1% for its sector) but the dividend has been growing fast, and is covered a healthy 2.3 times. Forecast EPS growth looks solid, at 6% this year and 9% in 2014, by which time that yield is predicted to hit 3.1%. My biggest worry is that Capita's shares have been volatile in recent years, and investors are buying at close to the peak. I like the company -- I just don't like the price quite as much.

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