Intertek Group (ITRK)
Should I Buy Intertek Group plc?
I’m hoping to take advantage of recent market falls to buy some good companies at lowly valuations. Should I pop Intertek Group (LSE:ITRK) into my basket?
Last time I checked out quality and safety services specialist Intertek Group, in April, it was trading as an almighty 26 times earnings. Although I found plenty to admire about the company, that was way too expensive for me to part with my money. I’m glad I held fire, its share price has since dipped 18% to today’s price of 3448p. That makes it notably cheaper, trading at just over 21 times earnings. But does that make it a buy?
Intertek was always going to struggle to sustain its recent explosive growth, which saw the share price soar a massive 230% in five years. It benefited from the growing global demand for energy, as Intertek carries out technical inspection services for the oil and gas, nuclear and renewable power industries. It also grew strongly on the back of a busy acquisition strategy.
Many UK companies struggle to make headway in China, not so Intertek, where last summer it was the surprise name on a list of top 10 UK companies in the country, holding its own against big names such as Unilever, Diageo, BP, Standard Chartered, WPP, HSBC, Burberry and ARM Holdings.
Growth looks set to slow
Intertek has been in China since 1989, operating in its third-party testing and certification market, and now generates 20% of its sales on the mainland and in Hong Kong. Its last interim management statement, in November, reported continuing strong organic growth in China, but the company has succumbed to headwinds elsewhere, notably in minerals, Europe and some US industrial inspection areas (although management expects them to ease next year). Intertek still posted 7.5% organic growth across the quarter, and predicted high single digit organic growth in future, but investor confidence took a knock.
When you’re trading such a high valuation, investors have high expectations of your growth prospects. So far, Intertek has delivered, with impressive earnings per share growth of more than 22% both in 2011 and 2012. I’m concerned that this is forecast to fall to around 10% in 2014 and 2015, suggesting it may struggle to meet expectations. Credit Suisse’s recent decision to downgrade it from buy to neutral, and cuts its target price to 3200p, shows I’m not the only one who is concerned.
Intertek could also take a hit as the Chinese growth story stutters. It has already been knocked by falling prices for natural resources, with its commodities division recently suffering a sharp 10% drop in profits.
The long-term outlook remains positive, and Intertek did benefit from the recent horsemeat scandal, which boosted demand for its food-testing services. Given recent headwinds, 21 times earnings still looks too expensive to me, but there may be a good buying opportunity soon, if current turbulence continues.
> Harvey doesn't own any company mentioned in this article. The Motley Fool owns shares in Unilever and Standard Chartered, and has recommended shares in Burberry.