Yahoo Finance As global economic prospects improve, it’s time to invest in this assurance and inspection supplier
The past few years have been exceptionally challenging for stock market investors.
Covid-19 prompted extreme economic and share price volatility, while geopolitical uncertainty has contributed to rampant inflation and rapid interest rate rises that are acting as a drag on economic growth and company earnings prospects.
While many investors may feel disillusioned with the performance of their stock portfolio, now is not the time to give up on shares. The market’s track record is littered with periods of temporary decline that have been followed by stunning recoveries. As a result, now is likely to prove an excellent buying opportunity for long-term investors.
Of course, recent years have also been tough for individual companies. Intertek, for example, has suffered greatly from Covid-induced challenges across its key markets.
Its financial performance is closely linked to the global economy’s prospects, since it provides testing, assurance and inspection services to buyers and sellers across a multitude of sectors that ensure safety, quality and regulatory standards are met.
The FTSE 100 company’s earnings per share figure fell by 20pc in the 2020 financial year and is yet to fully recover. This has resulted in disappointing share price performance since Questor advised readers to avoid it in April 2020, with its market value falling by about 18pc over the past three years.
By contrast, the FTSE 100 index has surged 35pc higher over the same period. This equates to a 53 percentage point underperformance versus the index since our “avoid” recommendation.
Now, though, the company is ripe for investment. It is set to benefit from China’s reopening following the end of its zero-Covid policy, with the world’s second-largest economy accounting for about 19pc of its total revenue.
According to the OECD, China is forecast to post GDP growth of 5.3pc this year, up from 3pc last year, and is set to have a positive impact on the global economy’s performance. Indeed, the world economy’s growth rate is expected to accelerate to 2.9pc next year from 2.6pc this year.
Despite a tough operating environment, Intertek has remained highly profitable. Over the past five years, for instance, its return on equity has averaged 31pc. This is relatively high – especially during a period of economic difficulty – and shows it has a clear competitive advantage that is likely to aid profit growth in future.
It has been able to generate a high return on equity figure despite having only moderate debt levels. Its net debt-to-equity ratio of 80pc and interest coverage ratio of 14 show that it has ample capacity to increase leverage to fund further acquisitions following the purchase of several businesses over the past year.
This has not only boosted sales but has been margin accretive at a time when many companies have experienced reductions in profitability. Although its operating margin was 1.2 percentage points lower last year than before the pandemic in 2019, it is expected to grow this year as a cost savings programme is fully felt.
An improving financial performance is likely to prompt a return to dividend growth following three years of zero growth. The company’s dividend had previously more than doubled between 2015 and 2019. Since dividends are covered twice by earnings and the stock currently yields 2.6pc, it remains a worthwhile long-term income holding.
Even after its poor share price performance over recent years, Intertek continues to trade on a relatively high valuation. Its price-to-earnings ratio, for example, is 19.2. Although this may dissuade some investors from purchasing it, the company’s upbeat growth prospects and sound fundamentals mean it is worthy of its premium valuation.
After all, the company’s financial performance pre-pandemic was extremely encouraging. Earnings grew at a double-digit rate over the four years before the emergence of Covid-19 and, having increased by 11pc last year in spite of tough operating conditions, strong growth is likely to be ahead as the world economy’s prospects ultimately improve.
Alongside a solid financial position and clear competitive advantage, this prompts Questor to reverse its previous “avoid” recommendation of the stock. It is likely to outperform the wider stock market as the company embarks on a long-term recovery following a challenging period.
Questor says: buy
Ticker: ITRK
Share price at close: £40.44
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