Management Resource Solutions PLC (AIM:MRS), a GBP£16.20M small-cap, operates in the professional services industry, whose performance is driven by other sectors including construction, financial and mining, making up a large chunk of revenues. Professional services analysts are forecasting for the entire industry, a positive double-digit growth of 10.49% in the upcoming year , and a massive growth of 30.96% over the next couple of years. However this rate still came in below the growth rate of the UK stock market as a whole. Today, I will analyse the industry outlook, and also determine whether MRS is a laggard or leader relative to its service sector peers. Check out our latest analysis for Management Resource Solutions
What’s the catalyst for MRS’s sector growth?
Business conditions are changing quickly for the service industry, with increased market competition primarily from new entrants entering into the space. Since revenues are generated primarily from project-work with clients from external companies, the lumpiness of revenues is driven by the activities of other sectors. In the previous year, the industry saw growth of 8.99%, though still underperforming the wider UK stock market. MRS lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means MRS may be trading cheaper than its peers.
Is MRS and the sector relatively cheap?
Professional services companies are typically trading at a PE of 17x, relatively similar to the rest of the UK stock market PE of 19x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 16.80% compared to the market’s 12.78%, potentially illustrative of past tailwinds. Since MRS’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge MRS’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? MRS has been a professional services industry laggard in the past year. If your initial investment thesis is around the growth prospects of MRS, there are other professional services companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how MRS fits into your wider portfolio and the opportunity cost of holding onto the stock.