Boom time for Computacenter as Dignity dives

by Graeme Evans from interactive investor |

One of these mid-caps has rallied hard since we backed them, but other is finding life tough. 

IT services group Computacenter (LSE:CCC) and funerals firm Dignity (LSE:DTY) are two stocks whose reputation with mid-cap investors for being a little dull has been shattered in recent times.

This was highlighted again today when Computacenter shares surged 10% on the back of another upgrade to guidance, while Dignity was 8% lower after suspending its dividend in the wake of a 63% slide in half-year earnings per share (EPS) to 23p.

Once regarded as among the safest stocks on the London market, Dignity has been undone by the ongoing impact of an industry-wide pricing investigation by the Competition and Markets Authority (CMA), and now a lower-than-expected UK death rate.

Whereas Dignity spent three years trading in a comfortable range between 2,000p and 2,600p, the stock has fallen sharply over the past year to its lowest level in a decade at 569p.

In contrast, FTSE 250 index-listed Computacenter has risen by more than 50% this year as the IT infrastructure services firm continues to rebound from 2018's re-rating of the tech sector.

We highlighted its recovery potential in January when shares were trading at 1,112p, noting that the company looked well-placed to benefit from the core tech drivers of digitisation, cloud, security and network capacity improvement. Computacenter advises organisations on their IT strategy, while also helping them to optimise performance, and manage their infrastructure. 

The company said today that its strong start to 2019 reported in April had continued, with half-year results now likely to be ahead of 2018's already challenging benchmark. The full-year out-turn is forecast to be materially ahead of current market expectations.

Analysts at Stifel said the update underpinned their positive view of the stock, which they believe has the potential to reach 1,882p from today's post-update level of 1,500p.

Stifel said Computacenter had "something for everyone appeal", with the progressive dividend and trend for paying special dividends a particular attraction for income investors.

Then there's the appeal to transformation-oriented investors of a focus on unlocking larger profit streams from the service portfolio. Growth investors get the drive into new digital services, while for the risk averse Stifel said Computacenter had an unrivalled track record in delivering EPS growth.

The broker added:

"For all investors, we believe Computacenter is the gift that keeps on giving - a share with a very good total shareholder return (TSR) track record - indeed it was the TSR champion for 2018."

Computacenter has stuttered at times, notably in 2005 and again in 2012 when it found itself locked into three loss-making service contracts in Germany.

Veteran CEO Mike Norris has seen more highs than lows during his 24 years at the helm, with one recent challenge being newer rivals such as Softcat, which only joined the stock market in 2015 and already has a larger market capitalisation than its more established rival. 

Unlike Computacenter, the outlook for Dignity is much more uncertain due to the CMA investigation into a market where there's been a big rise in the number of new operators.

Dignity believes the investigation is a positive for its long-term prospects, although it could be caught in the cross-fire should the regulator decide to impose some form of price control. 

In the meantime, chief executive Mike McCollum is stepping up a transformation that's already seen the launch of more simpler pricing plans. The strategy also includes an overhaul of its 800-strong branch estate, which is expected to be "radical, complicated and challenging" work.

McCollum said:

"As a board we are determined to seize the current opportunity to create a business that is clearly differentiated from the competition and gives customers a clear choice."

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.

The content is not intended to be a personal recommendation, and is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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