FTSE 250 wealth-builder

IT services provider FDM Group (LSE: FDM) is unlikely to make headlines. The company recruits and trains graduates, ex-services personnel and those wanting to return to work in technical skills. In return for this instruction, FDM’s consultants — otherwise known as Mounties — then work for the £1.2bn cap for a minimum of two years. 

From an investment perspective, this business model was never going to compete with glitzy tech stocks whose share prices have shot the lights out over the pandemic. Nevertheless, anyone buying FDM’s stock in March 2020 will have seen their holding more than double in value. That’s a superb return. It’s also far better than the 33% or so seen in the FTSE 250 as a whole.

The shares are rising again today following the release of FDM’s latest set of interim results. 

Rising demand

Revenue may have fallen 7% to £131.3m over the first six months of 2021, but it’s important to put this in context. FDM had a great Q1 before Covid-19 arrived in 2020. This means that the number of Mounties being deployed so far in 2021 always had the potential to be lower. 

Moreover, some regions seem to be doing better than others. Collectively, revenue growth of 15% was logged for Europe, the Middle East and Africa. In the Asia Pacific region, a 24% jump was seen. On the flipside, demand in the US had been “more subdued“. 

Pre-tax profit fell 3% to £20.5m. That said, the latter was actually 9% higher (at £22m) on an adjusted basis.

Perhaps most tellingly, the FTSE 250 member stated that it had significantly increased recruitment and training levels over the first six months of 2021 to meet demand. As a potential investor in a forward-looking market, this is the sort of signal I’m hunting for. I also like the fact that 31 of 37 new clients come from outside of financial services, helping to diversify earnings across sectors.  

Frothy valuation

Signing off today’s statement, CEO Rob Flavell said that FDM was “well placed” to hit expectations for its full year. This suggests there could be further upside to the FDM share price, especially if operations in the US bounce back to form. 

For balance, however, it’s worth considering a few risks.

One that jumps out at me is the current valuation. Before markets opened this morning, FDM shares were trading on a heady forward earnings multiple of 36. Now, I think the company’s consistently high returns on capital and margins go some way to supporting this. FDM also boasts a solid balance sheet, which is more than you can say for some stocks in the FTSE 250.

Even so, I can’t deny that the recovery in business looks pretty priced in. And as Boris Johnson continually stresses, we’re not in the clear just yet. Any disappointing results could send the shares downwards.

Watchlist addition

I doubt this FDM will ever set the market on fire. Assuming I wasn’t attempting to grow my portfolio at a faster clip at potentially greater risk, however, I’m inclined to regard FDM as a decent addition to a suitably diversified portfolio.

For now, it stays on my watchlist until a potentially better entry point appears.

I’m not keen on paying over the odds for my shares, so I’ve been hunting for bargain UK tech stocks that still look cheap enough to offer the potential for big gains. I’ve unearthed three tech stocks I want to own.

Too cheap to ignore?

Shares in price comparison website Moneysupermarket.com Group (LSE: MONY) have lagged the market this year, due to a pandemic-related slowdown in sales. However, although earnings are expected to slump in 2020, analysts expect a strong recovery in 2021.

Is that realistic? I think so. The main areas where Moneysupermarket has suffered this year have been travel insurance and personal finance. No one has been travelling outside the UK and banks have been cutting bank on new loans, due to concerns about the economy.

I expect both of these headwinds to ease by next summer. Meanwhile, the firm is targeting growth opportunities such as mortgage lending and providing its services to commercial partners, such as banks.

Looking ahead, MONY shares trade on around 16 times 2021 forecast earnings, with a dividend yield of 4.6%. Moneysupermarket has no debt and delivers profits margins of about 30%. I think this UK tech stock is too cheap and I’ve been buying it for my portfolio.

I’d back owner management

IT services group FDM Holdings (LSE: FDM) provides business and technical experts to work on client sites. These are called ‘Mounties’ by the firm. To give you an idea of scale, the company had 3,721 Mounties placed with clients at the end of September.

One of the things I like about this business is it’s run by owner management. CEO Rod Flavell and chief operating office Sheila Flavell own around 15% of the business between them. That gives them a collective stake worth around £170m. I reckon they should be motivated to deliver strong shareholder returns.

FDM is a profitable business too. The group’s operating profit margin has averaged more than 18% in recent years and cash generation is good. Although last year’s dividend was cut, analysts expect a payout of 34p per share this year, giving a useful 3.3% yield.

Broker forecasts suggest a return to earnings growth in 2021. I’m happy to keep holding and buying FDM shares.

The next UK tech stock I’ll buy?

The final company I want to look at is FTSE 100 accounting software group Sage (LSE: SGE). It disappointed investors recently when it warned profits could dip in 2021.

Sage’s share price has fallen more than 15% over the last month. That’s left the shares trading at a level last seen when the stock market crashed in March.

I think this negative sentiment has gone too far. Sage is continuing to make good progress converting customers to its cloud-based subscription services. This is limiting growth today. But, in future years, I expect the firm’s recurring revenue to support reliable, growing profits.

The company is also increasing its spending on new products and services. For a tech business, I generally see that as a good thing. Anyone who doesn’t innovate gets left behind.

Sage has a long track record of high profit margins and strong shareholder returns. I’m hoping to use the current lull to add some Sage stock to spice up my portfolio.

That’s where this FTSE 250 stock comes into play.

The opportunity

FDM Group (LSE:FDM) operates in the recruit, train, and deploy sector, or more specifically, helps individuals – such as graduates and ex-military – gain the necessary training and experience to thrive in their careers.

The firm specialises in a wide array of technical services from software development and testing to cybersecurity and robotic automation.

After recruiting and training individuals through the firm’s academies around the world, the company deploys them at its ever-expanding portfolio of sites within its client’s businesses.

The FTSE 250 stock charges its customers with consulting fees. In exchange, businesses receive new talent to drive their business forward without having to do any in-house training of their own.

While training and consulting is hardly a flashy sounding business model, the performance of the company has continued to impress shareholders since its 2014 IPO with a return of 226%!

The financials

Each year has been a continual improvement on the last, with revenue and operating profit increasing year-on-year by an average of 14% and 15%, respectively.

What I find truly compelling is the incredibly high return on equity (ROE) of over 50%! As a reminder, ROE is a measure of how efficiently a company is generating income from its equity financing – investors’ money. It should be noted that the jump in 2018’s ROE is actually as a result of an increase in debt levels rather than organic growth.

Looking at the return on invested capital (ROIC) gives more clarity into what is going on under the hood. ROIC is a measure of how efficiently a company is generating income from the capital it has invested in operations and growth. This shows a declining trend, and thus the firm’s returns from its investments have declined. However, an ROIC of 57% is still exceptionally high and provides further evidence of the company’s ability to grow investor wealth.

Both ROE and ROIC should be monitored in the future so that any signs of weaknesses emerging in the business model can be identified quickly.

The bottom line

The FTSE 250 stock is certainly not without competition. One such competitor is the software company Learning Technologies Group, which provides an alternative method for businesses to train their staff.

However, training personnel is a lengthy process, and FDM Group is capable of providing expert consultants at a moment’s notice. I believe this time-saving advantage, combined with both reduced training costs for clients, and FDM Group’s high-standing reputation gives it this FTSE 250 stock the edge needed to continue providing extraordinary returns.

The stock market crash has slashed the valuations of many high-flying growth stocks. Many have bounced back strongly, but I think there are still some bargains to be found.

Today I want to look at two of my favourite growth stocks and explain why I think they could help you hit a million.

A long-term winner

My first pick is price comparison firm Moneysupermarket.com (LSE: MONY). I’m sure this business needs no introduction, but you might be surprised at just how profitable it is.

Helping customers find cheaper credit cards, loans, insurance and energy suppliers generates big commission payments for Moneysupermarket. In 2019, the group generated an operating margin of 30% on revenue of £388m.

Although the coronavirus pandemic has hit demand for many popular financial products, I only see this as a temporary disruption. Moneysupermarket’s profits rose by 50% between 2015 and 2019, and the company is developing new services to support future growth.

City forecasts suggest profits will fall by around 10% in 2020, before rising by 15% in 2021. This puts MONY shares on a forecast P/E of about 17 for 2021, with a dividend yield of 4%. I rate the stock as a buy at this level. In my view, this is one of the best growth stocks you could buy today.

Under the radar: a top growth stock I’d buy now

IT specialist FDM Group (LSE: FDM) probably isn’t a company you’ve heard of. This FTSE 250 firm provides IT consulting services for clients. Areas where FDM works include software testing and development, project management and business analytics.

FDM directly employees all of its consultants (known as ‘Mounties’) so it can provide a consistent and reliable service to clients. The company is run by CEO Rod Flavell, who owns 7.5% of the stock, suggesting that his interests should be closely aligned with those of smaller shareholders.

Revenue topped £250m for the first time in 2019, generating an operating profit of £53m. Like Moneysupermarket, this business is highly profitable and generates a lot of surplus cash. This is used to fund continued growth and pay generous dividends.

FDM’s dividend is paused right now, but trading has remained stable so far this year. I expect dividend payments to restart fairly quickly.

The shares currently trade on 24 times 2021 forecast earnings. That may seem expensive, but I think FDM’s strong growth record and high profitability justify a high price. I’ve been buying more during the stock market crash.

Make a million quicker

The average long-term return from the FTSE 100 is 8% per year. My sums suggest that if you invest £250 per month in the FTSE within a tax-free ISA, you’d hit £1m after 41 years.

FDM and Moneysupermarket have generated average earnings growth of 15% per year since 2014. If you can build a portfolio of shares that generate this kind of growth, I estimate that you could build a £1m ISA in just 26 years.

That’s why I reckon these are two of the best growth stocks you can buy now.

A different business

FDM Group (LSE: FDM) is a supplier of IT consultants, that it calls Mounties. Revenue in the last three years has gone from £189.4m to £244.9m, an increase of 29%. Meanwhile, profit before tax has jumped from £35.3m to £48.3m, a 37% rise.

With a growing client base and increasing geographic diversity, I believe that FDM is tapping into a huge market opportunity, delivering its own trained Mounties to client premises to deliver a high-value service. I expect the market will grow substantially in the coming years, as IT becomes ever more important for businesses.

The group has no debt and at the time of its 2018 annual report and in fact had a closing cash balance of £33.9m. Conservative management of the business leads me to believe that the business will flourish whatever the next 12 months may bring.

With the share price haven fallen during 2019, I’m optimistic of a rebound in 2020, especially now as the group has a yield of just under 4% and trades on a price-to-earnings ratio of around 21.

With a progressive dividend policy in place, I expect FDM will keep rewarding shareholders with larger dividend payouts alongside an improvement in the share price over the next 12 months.

Going for growth

Ascential (LSE: ASCL) is another FTSE 250 listed company that also hasn’t had the best 2019, with its share price down 10%. The exhibitions and information services provider now has a P/E of 22, which is down from 26 based on the previous year’s earnings per share, so the shares have been more expensive in the past.

The P/E, however, is not what I like about the company. What I like is its half-year results which showed that pre-tax profits rose to £30.5m from £23.1m as revenue increased 25% to £236m. The company also is intent on continuing to deliver double-digit growth.

The company is also investing in growth. It has bought an initial 35% interest in cybersecurity provider Avast’s marketing analysis unit, Jumpshot, for $60.8m. It is likely that in the coming years Ascential could take a majority stake in the business.

Ascential is a high-margin business with an adjusted earnings before interest, tax, depreciation, and amortisation, and margin of just over 29% which I think makes it easier for the group to grow. Net debt leverage has also been reduced dramatically which I think will boost future profitability, it now sits at 1.1 times. In 2017 it was 2.3 times.

As the cold winter nights draw in, I’m optimistic about the chances of success for both these companies that struggled to achieve share price growth in 2019. I think 2020 could be far more rewarding for shareholders.

Profitability is still some way off for the firm. This is why it is reliant on fundraising, which is fine until the money starts to run out, at which point the company could get into some serious hot water. 

Investing in the firm is inherently risky. There is still the potential for massive rewards for backers. It could still complete the fundraising and so far it has only encountered a nerve-wracking setback rather than a final nail in the coffin. Investors often fret about things that get resolved, so it could be that Sirius bounces back in the coming months. But there are no guarantees. This is why I would personally far rather put my hard-earned money into this next share that I think is a hidden gem.

A unique business

FDM Group (LSE: FDM) is a supplier of IT consultants – referred to as ‘Mounties’. The company says “we work in partnership with our clients to help them achieve specific business objectives through the provision of quality IT and business solutions.” It means recruiting, training and hiring graduates, ex-forces personnel and those looking to return to work after a career break who are then deployed, once they have the skills. to client sites.

The model seems to work very well. For the six months ending 30 June, revenue increased 14% to £134.4m and profit before tax by 9% to £24.9m. The company is moving into new countries such as The Netherlands and Australia while also diversifying its client base away from financial services. I think both the geographic and client base expansion are good news for investors and should allow the company to grow further.

Going international

FDM is doing very well in North America where Mountie revenue for the six-month period to 30 June grew by 22% to £46.5m. This has led to increased training capacity in the US with it running rolling pop-up training centres in Austin and Charlotte during the period as it looked to establish a footprint in those areas. In addition to having training facilities, it created a dedicated recruitment hub in Charlotte focussed on recruiting graduates from across the US.

Other regions also contributed to the growth. In EMEA, Mountie revenue for the six-month period grew by 15% to £7.6m. In APAC it rose by 20% to £10.2m. I think growth in all the regions shows management has a good focus on growth and I believe that bodes very well for the future.

The IT services supplier seems to be flying under the radar a bit at the moment and investors looking to maximise their returns might want to consider it ahead of the more volatile Sirius Minerals.

At the same time, the prospect of rising interest rates and an uncertain future for the UK economy could mean that the buy-to-let sector becomes less appealing. As such, buying Vodafone, and another dividend share which reported an upbeat update on Tuesday, could be a shrewd move, in my opinion.

Dividend growth potential

The company in question is information technology global professional services provider FDM Group (LSE: FDM). Its trading update for the year to 31 December showed continued strong operational performance, delivering results in line with expectations.

Revenue for the year increased by 5% to £245m, while market demand in all of its operating territories remained strong. It’s also experienced record levels of client engagement and demand and is optimistic for further growth in the current year.

Net profit growth in the 2019 financial year is expected to be 9%. This is due to catalyse the company’s dividend so it has a yield of 4%. If forecasts are met, its dividend payout will have increased at an annualised rate of 36% over the last five years, which suggests that it’s becoming an increasingly appealing income opportunity. As such, FDM Group could deliver improved stock price performance after its decline of 13% in the last year.

Recovery prospects

Also posting a disappointing share price performance over the last year has been Vodafone. The company’s shares are down by over a third during that time, underperforming the FTSE 100 by 23%.

Debt concerns seem to be the main cause of its share price fall. The €19bn acquisition of Liberty Global’s cable networks is expected to lead to further pressure on what is an already highly-indebted balance sheet. And while its management team recently allayed concerns over a dividend cut in the near term, it remains a possibility over the next few years.

Even with a dividend cut, though, Vodafone is likely to continue to offer a higher yield than the wider index. It currently yields 8.8%, versus 4.5% for the FTSE 100. It’s also putting in place an aggressive cost-cutting programme which may help to make the business more flexible and efficient.

Although there are risks facing the company and the world economy, it offers diversity and the potential to obtain a high yield. For long-term investors, therefore, it could offer investment potential from both a value and income perspective. As ever, buying potentially undervalued shares is never without risk. But the rewards that are on offer could make it a much stronger opportunity than a buy-to-let.

It proved to be the case. Twelve months later, the shares are up almost 9% in value. The other company — Carillion — no longer exists.

In retrospect, it was never a fair contest. Nevertheless, today’s update from the mid-cap — and the renewed interest in owning its stock — is yet another demonstration of why it can sometimes be a good idea to back companies experiencing significant (but temporary) difficulties. Let’s look at those numbers in more detail.

“Successfully stabilised”

Group revenue from continuing operations rose by 8.3% to £233.2m in the year to the end of May. Perhaps more significantly, the company bounced back into profit by the end of the reporting period, registering a gain of £11.9m compared to the £44.8m loss sustained in 2017.  

More good news included a 36% reduction in net debt (to £27.8m). Assuming this continues to fall, it’s likely that dividends — which were maintained at 4.65p per share for the year — will climb higher in time, thus rewarding loyal holders who stuck with the company when its share price fell through the floor in October 2016 and again in February last year.

Following significant changes to management, an organisational restructure and the sale of non-core units of the business (Web Performance and Software Testing), Chairman Chris Stone reflected that the company has been “successfully stabilised“, adding that expectations for adjusted earnings before interest and tax (EBIT) in 2019 “remain unchanged“.

Taking into account the progress that’s been made and the fact that NCC’s markets “remain buoyant“, it’s perhaps unsurprising that this morning’s figures have encouraged investors to reassess the company, resulting in a 10% rise to its share price.

Whether a valuation of 28 times forecast earnings before today represents good value for a company trying to rebuild itself is questionable, but in a world where the demand for cybersecurity services is only likely to grow, at least some investors appear willing to pay up.

Increased demand

Of course, not everyone wants to buy into a recovery story. One company that’s already doing rather well is international professional services provider FDM Group (LSE: FDM).

Although news flow has been pretty quiet over the last few months, April’s pre-AGM update suggested the business looks like meeting its full-year targets. First quarter revenue from its IT consultants (Mounties) was 17% higher in constant currency compared to 2017 with 3,310 stationed at client sites at the time of the announcement (compared to 2,826 the year before). 

Changing hands for almost 29 times earnings, FDM will be of absolutely no interest to value hunters. Indeed, having more than doubled in price in just two years, a lot of growth-focused investors may regard this valuation as rather frothy.

Since trying to guess the short-term trajectory of any company’s share price is arguably a waste of time, it’s probably better to dwell on those things we do know. These include the consistent (mostly double-digit) rises in earnings, huge returns on capital employed, no debt, a near-3% dividend yield and increased demand for its services from businesses needing to be GPDR-compliant.

Based on these qualities, FDM was never going to be cheap. Just be sure you’ve got a head for heights if you’re considering adding it to your portfolio.

Looking ahead, there could be more pain for investors in the company. Its strategy seems to be struggling to gain traction in an increasingly competitive quad-play industry. Therefore, it could be worth selling in order to buy another income stock which may have passed under the radar of many investors.

Declining profitability

In the current year, BT is expected to report a fall in its bottom line of 6%. This follows last year’s drop in profitability of 9% and shows that the company is experiencing a difficult period at the present time. Despite this, it continues to increase dividend payments on a per share basis. For example, they are expected to be over 11% higher this year than they were two years ago. This suggests that the company’s dividend affordability is declining.

In fact, BT’s dividend coverage is due to fall to 1.7 times in the current year from 2.3 times in 2016. Although its current coverage ratio may be relatively high when compared to some of its index peers, the stock lacks earnings growth potential. It is due to report a rise in earnings of 3% next year, followed by growth of 1% in the following year. This could mean that the pace of dividend growth slows down dramatically.

Furthermore, with pension costs and investment for future growth continuing to be a drain on its cash resources, dividends may become less of a priority for the company. As such, it appears to be a stock to avoid from an income perspective.

Impressive outlook

One stock which could be worth buying for its income prospects is global professional services provider to the information technology industry FDM Group (LSE: FDM). It released results for the 2017 financial year on Wednesday which showed that it has delivered strong operational and financial progress. Its revenue increased by 23%, while profit before tax moved 26% higher on an adjusted basis. This allowed it to increase dividends per share by 33%, which puts it on a dividend yield of 2.5%.

Looking ahead, FDM is expected to deliver a rise in dividends of 10% per annum during the next two years. This means it could offer an inflation-beating yield over the medium term. This could boost investor sentiment in the stock – especially since its earnings growth rate is set to be high. Over the next two years its bottom line is forecast to increase by around 9% per annum, which suggests that a double-digit dividend rise could be very affordable for the business. As such, it could be an attractive dividend stock.

Today FDM issued a trading update stating “group’s performance for the year to 31st December 2017 will be ahead of its previous expectations.” Revenues for the period are now projected to expand 23% to £233m thanks to an increase in the number of “Mounties” placed on client sites of 17% to 3,170. 

FDM’s ‘Mounties’ are its own permanent IT and business consultants, which it trains and then sends out to work with businesses. 

Global growth 

FDM saw double-digit demand for its services all over the world during 2017 with the most substantial increase in Mounties deployed being in the Asia Pacific region. Here, the number of consultants placed rose 30% year-on-year, although, with only 306 Mounties in Asia, there’s still plenty of room for the group to grow. For comparison, at the end of the year, the firm had 1,744 consultants deployed in the UK. 

Building its presence in Asia seems to be one of the critical objectives for FDM in 2018. Commenting on today’s trading update, CEO Rod Flavell declared “2018 will see the Group continue to invest to deliver long-term, sustainable growth, increasing capacity in existing territories while also building its presence in some of its more nascent territories.” This expansion should underpin further earnings and dividend growth. 

City analysts are already expecting big things from the company. Earnings per share are expected to grow 21% for 2017 and then 10% for 2018. This earnings growth is expected to underpin an astonishing 24% increase in the group’s dividend payout to investors over the next two years. Even though FDM only yields 2.8% at present, its record of dividend growth is enough to qualify it as a dividend champion as over the past four years the payout has grown 200%. With no debt and earnings expanding rapidly, it looks as if this growth is set to continue.

Zero to hero in five years 

Another dividend champion you should consider for your portfolio is Howden Joinery (LSE: HWDN). A kitchen and building supplier that only sells to the trade, Howden has an exciting business model. 

Each of the company’s depots is run as an individual fiefdom where depot managers receive a share of the depot profit, which can be a life-changing sum. Using this model, the firm has been able to grow steadily over the past six years without succumbing to over-expansion or price wars with competitors. Since 2014, earnings per share have increased at a compound annual rate of 17.5%. 

Over the same period, the company’s dividend payout has exploded from 0.5p per share to an estimated 11.3p for 2017. As the payout is covered just under three times by earnings, and as there’s approximately £225m of cash on Howden’s balance sheet, it looks as if this distribution is secure for the foreseeable future. 

Unfortunately, the stock only yields 2.7%, which is around 1% below the FTSE 100 average. Nevertheless, the lower yield is worth it for the security of the payout. What’s more, as Howden continues to grow earnings, the payout should rise further. According to my figures, 10% per annum payout growth implies a yield of 4.1% by 2023.