Serco sheds ‘basket case’ tag, but shares on shaky ground

<p>Shares of Serco, the UK-based outsourcer, surged more than 10% on Wednesday after it shed the tag of ‘basket case’ by reaffirming previous profit and […]</p>

Shares of Serco, the UK-based outsourcer, surged more than 10% on Wednesday after it shed the tag of ‘basket case’ by reaffirming previous profit and sales targets.

In fact, this pledge amounted to little to more than the company saying that its trading profit for the first half of the current year would show no progress compared to the same period during the year before, and, H1 revenue would be 15% lower.

For the full-year, the public and private sector contractor whose focus industries include aviation, military, detention and education, said it foresaw £3.5bn in revenue and a trading profit of around £90m, reiterating forecasts initially given in March.

Serco investors are clearly surprised at its newly revived consistency, and the lack of its recent customary garnish of bad news in today’s update.

Buyers are reacting to signs that the company’s root-and-branch revamp led by a grandson of Winston Churchill, former Aggreko CEO, Rupert Soames, may be bearing fruit.

It’s worth remembering though, that after a disastrous period of contract problems and scandals that strained ties with its premier client, the British government, leading Serco to warn that it would see no sales growth for three years, its stock underperformed its FTSE 250 benchmark by almost 70% in a year.

17% of that fall came since early March, underlining that this now non-dividend paying stock, has also fallen from great heights in terms of status as a favoured holding of institutional investors, after it ditched its dividend last year.

Today’s surge of as much as 13% still leaves it 80% lower from all-time heights in July 2013.

The stock now looks very much like a favourite of short-term traders on the upside and downside, with more than 6% of its shares out on loan (AKA borrowed for the purposes of selling it short) according to FCA data.

Whilst momentum currently looks favourable, a gap formed by today’s jump leaves the stock potentially vulnerable.

Slippage would return SRP back to its latest downward channel.



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