Armadale Capital Plc (AIM:ACP), a GBP£2.67M small-cap, operates in the commercial services industry, which generally follows the ups and downs of the economic cycle, as its services cater to various industries across different sectors. Commercial services analysts are forecasting for the entire industry, a fairly unexciting growth rate of 5.02% in the upcoming year, and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the UK stock market as a whole. In this article, I’ll take you through the sector growth expectations, as well as evaluate whether ACP is lagging or leading in the industry. Check out our latest analysis for Armadale Capital
What’s the catalyst for ACP's sector growth?
E-commerce remains a later driver of growth for commercial services, which enables service companies to grow share and reduce cost to serve. A crucial strategy for incumbents is to be well-positioned in response to the growing importance of stockless independent dealers, as well as building up their own capabilities around e-commerce. In the previous year, the industry saw growth of 3.81%, beating the UK market growth of 1.54%. ACP leads the pack with its impressive earnings growth of 62.35% over the past year. This proven growth may make ACP a more expensive stock relative to its peers.
Is ACP and the sector relatively cheap?
The commercial services industry is trading at a PE ratio of 22x, in-line with the UK stock market PE of 18x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 15.19% compared to the market’s 12.78%, potentially illustrative of past tailwinds. Since ACP’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ACP’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ACP recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto ACP as part of your portfolio. However, if you’re relatively concentrated in commercial services, you may want to value ACP based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If ACP has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the commercial services industry. Before you make a decision on the stock, take a look at ACP’s cash flows and assess whether the stock is trading at a fair price.