Data centre and IT services group Computacenter (LSE: CCC) had a mixed year in 2016. Strong sales and favourable currency shifts saw revenue rise by 6.1%, to just over £3,245m. But tough trading conditions in the UK meant that the group’s underlying pre-tax profit was broadly flat, at £86.4m.
Today’s results put Computacenter stock on a P/E of 14, with a yield of 2.8%. These figures may not sound especially cheap, but I believe this firm offers a genuine value opportunity potential for investors.
More profitable than you think
Computacenter’s operating margin of 2.7% might suggest to you that this isn’t a very profitable business. But many investors believe that return on capital employed (ROCE) is a better measure of true profitability. ROCE measures a company’s profits, relative to the amount of money that’s invested in the business.
A high ROCE usually indicates that a company will generate strong free cash flow. This can be used to fund growth without debt, or else be returned to shareholders through dividends.
Computacenter generated a ROCE of 20% in 2016. Companies with such high ROCE often trade on high P/E ratios. In my view, Computacenter’s P/E of 14 is relatively low for such a profitable business.
The group’s net cash balance rose to £144m last year. It now accounts for 116p per share. That’s about 15% of Computacenter’s market capitalisation, which is quite high. Perhaps surprisingly, the board hasn’t declared a special dividend for 2016. One possible reason for this is that the group is reviewing acquisition opportunities.
Computacenter isn’t immune to risks. Trading was disappointing in the UK last year, and the group’s French and German operations could be hit by Brexit. But performance is expected to improve in 2017 and I believe the shares remain a buy at under 800p.
This one is really cheap
If you prefer value stocks with low P/E ratios and high dividend yields, then I have a different suggestion. Oil and gas services group Petrofac Limited (LSE: PFC) currently trades on a forecast P/E of 9.6, with a prospective yield of 5.9%.
The group’s outlook for 2017 and 2018 shows limited growth, but in my view this is already reflected in Petrofac’s share price. However, what makes these shares really attractive to me is that the risk of future problems looks much lower than it did a year ago.
Petrofac’s debt levels have fallen steadily since peaking in 2014. At the end of last year, net debt was $617m. That’s less than twice the group’s net profit of $320m and gives a net debt/EBITDA ratio of less than one. By any measure, Petrofac’s debt levels are quite modest.
A second attraction is that the group’s strong free cash flow seems to have survived the oil market downturn. Petrofac shares trade on a trailing price/free cash flow ratio of about 10. That’s very affordable and shows that the group’s earnings and dividend are supported by surplus cash generation.
I believe the recovery in the oil market will gradually continue. On this basis, Petrofac could be an excellent way to profit from this sector while enjoying a generous 5.9% income.