MITIE - An impressive company at a fair price?

Sunday, Oct 30 2011 by
3
MITIE  An impressive company at a fair price

Warren Buffett has a name for companies that are virtually certain to grow consistently for decades into the future. He calls them The Inevitables. Now, Mitie may or may not be an ‘inevitable’, but it sure does a fantastic impression of one. MITIE have produced record revenues, earnings and dividends for over 10 years straight. That in itself is fantastic, but this isn’t some utility company growing at a couple of percent a year. Their growth rate has been something like 10% a year and more. As a buyer of above average companies, this is exactly what I like to see.

Much like Tullett Prebon, a large part of that growth has come from the sector they operate in.  As an outsourcing company they help clients to offload non-core property and facility management tasks.  This means they do a bit of almost everything including reception desk, security, cleaning, engineering, maintenance, waste and energy management and much more; basically they cover almost everything to do with looking after buildings and more besides.

The outsourcing market has been a pretty hot place to be over the years as it’s grown from a niche market providing single services like cleaning or repairs into a far larger, more mainstream and mature market where outsourcing companies now look to provide bundled services and more recently, full business process outsourcing.

MITIE have ridden this wave expertly, building a great company and a great reputation in the process.

A good example of the sort of interesting projects they do now was the design, build and operation of a distributed green energy centre for the first Waitrose on the Isle of Wight. This energy centre will help the superstore to its goal of being carbon negative.

So MITIE have a very broad scope, from cleaning services to green power centre construction and operation.

MITIE Value?

One thing I hate to do is prognosticate about the future. I'll leave that to others who can endlessly seek to gain an edge over each other by trying to work out what next year will look like for a given company or economy.  Instead I try to pick companies that can do well no matter what. That’s exactly why I look for companies like MITIE and AstraZeneca which have long histories of success, hopefully in sectors that aren’t likely to die out in the next few years.

One metric I have developed recently is called PEGY10 and it’s basically an extension of the existing PEGY ratio.  Instead of the current PE it uses PE10 (price over ten year average earnings) to measure value.  It then uses an estimate of the ten year growth rate (basically the average of the 3, 5 and 10 year revenue and earnings growth rates) to measure growth, and the current yield as the measure of income.

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It’s kind of a PEG ratio on steroids that includes dividends and is most suitable for larger, more stable companies.

Versus the FTSE 100

It’s relatively easy and perhaps appropriate to calculate the PEGY10 ratio for the FTSE 100 as that’s the target that most investors are trying to beat. Currently the FTSE 100 is around 5,500.  That gives a PE10 of around 14.5 and a yield of about 3.3%.  I calculate earnings growth to be around 7.6% a year which all gives a PEGY10 ratio of 1.3.

For MITIE, the share price is around 250p.  That gives a PE10 close to 18.9 and a yield of about 3.8%.  Average annual growth is something like 15.2% which gives a PEGY10 ratio of 1.0.

Overall you can see that MITIE is more expensive relative to past earnings, but it has a higher growth rate and a better yield and ultimately a getter PEGY10 score.

On that basis, as well as the fact that MITIE has a long history of profit growth, dividend growth and low debt, I’m happy to invest. 

I’ve added MITIE to the UK Value Investor model portfolio and my own pension with an approximate five percent weighting.


Filed Under: Value Investing,

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Disclaimer:  

This article is for information and discussion purposes only and nothing in it should be construed as a recommendation to invest or otherwise. The value of an investment may fall and an investor may lose all their money. Any investments referred to in this article may not be suitable for all investors.  Investors should always seek advice from a qualified investment adviser.


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Mitie Group PLC is a holding company. The principal activity of the Company is to provide management services. Its activities are focused on the provision of strategic outsourcing services. It operates in the Republic of Ireland, the Isle of Man, Guernsey, Jersey, Germany, France, Finland, Norway, Sweden, the Netherlands, Spain, Poland, Switzerland and Belgium. It operates in four segments: facilities management, property management, healthcare and energy solutions. Its facilities management division delivers facilities consultancy, management and service delivery to its clients. Its Property Management division offers an integrated property management service, including mechanical and electrical engineering, energy and more general facilities management services in addition to the traditional services, such as maintenance, refurbishment, painting, roofing, interior fit-out, fire protection, plumbing and heating. Effective January 15, 2014, it acquired Complete Care Holdings Ltd. more »

Share Price (Full)
300p
Change
4.6  1.6%
P/E (fwd)
11.1
Yield (fwd)
4.1
Mkt Cap (£m)
1,089



  Is Mitie fundamentally strong or weak? Find out More »


7 Comments on this Article show/hide all

MadDutch 31st Oct '11 1 of 7
1

Sharescope calculates the annualised return over any part of the company graph that you select.

The longest period available is from January 1994, and the annualised share price return is 14.7% per annum. That excludes the additional compounding effect of reinvested dividends.

I think Mitie is a buy.

MadDutch

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UK Value Investor 1st Nov '11 2 of 7

In reply to MadDutch, post #1

Hi MadDutch. It's interesting that the share price return is so close to my calculation of growth, which is a weighted average of earnings and revenue growth over the last decade.

I guess it means that the valuation has always been fairly consistent and shareholders have been rewarded for the underlying growth in the company, while not being punished for overpaying in the past.

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MadDutch 1st Nov '11 3 of 7

In reply to UK Value Investor, post #2

Hello UK Value,

I value shares on the quality of the business model.

Mitie has brilliant corporate model and very high calibre of management at all levels. That is because they retain the management of the businesses they absorb.

MD

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fourayes 3rd Nov '11 4 of 7

Hello MadDutch,

Statistics may not tell you everything, especially averages of growth. For instance from their 2001 peak, at 185 in Jan 2001 to present at 243, MTO show 2.55% compound capital growth over the 10.8 years; but in the decade before that around 18% compound. Like most growth companies, things must always slow down as size increases and the company enters it's mature phase.

A chart plotted with an exponential price axis demonstrates this clear change of slope around 2000.

My own holding from 1998, which straddles these two periods, shows a compound capital growth rate of 10.5% to date, and I am reconciled to that steadily decreasing in future.

Fourayes

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MadDutch 3rd Nov '11 5 of 7

In reply to fourayes, post #4

Thanks Fourayes.

It also depends on the maths, the formula Sharescope uses, and that is always wrong because it does not include the total return including dividends. Your return is better than it looks at first sight as dividends have been improving.

Sharescope does have the FTSE 100 total return. If only the brainless journalists who publish so much unnecessary gloom & doom, could be a bit less lazy and use that; many more people would be enriching themselves via the stock market.

That said, Mitie is a magnificent company to be invested in.

MD

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pgbarlow 5th Nov '11 6 of 7
1

I used to invest in MITIE but transferred my attentions to MEARS back in 2003 when MEARS were definitely outperforming. This quite technical article has reawakened my interest and I will take a closer look. The dividends are attractive now that I am retired.

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UK Value Investor 9th Nov '11 7 of 7

In reply to pgbarlow, post #6

pgbarlow, I also own shares in Mears so it's not an either/or thing... they both look good to me.

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My name is John Kingham and I'm the editor of UK Value Investor, an investment newsletter for defensive and income-focused value investors. That means I write about buying large, successful companies with long track records of profitable dividend growth, and buying their shares at low valuations and with high yields. My website includes a unique stock screen and a model portfolio which is managed using a checklist-based investment strategy.  The goal of the strategy is to produce a portfolio which combines a high yield and good capital growth with low risk, and which is easy to maintain in just a few hours each month. more »



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