Is it time to buy this fallen mid-cap star?

Cost pressures and economic uncertainty mean this former high-flying IT stock has been under more selling pressure, despite favourable broker comment. 

A FTSE 250 stock whose run of unbroken growth is now up to 68 quarters continues to find itself out of favour despite today’s annual results underlining the City’s “buy” case.

A sector de-rating fuelled by economic uncertainty means shares in IT infrastructure services firm Softcat (LSE:SCT) are now half their record high of 2.200p seen just over a year ago, with the stock also spending much of today’s session in negative territory.

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That’s despite Softcat extending its record of growth, with annual operating profits up 14% to £136.1 million on revenues more than a third higher at £1.1 billion.

A final dividend of 16.6p for payment on 19 December represents growth of 15.3% and will be accompanied by another special dividend following the award of 12.6p a share. It means the total amount returned to shareholders since its 2015 IPO now stands at £401.2 million.

Chief executive Graeme Watt said the company was in a strong competitive position heading into the new financial year, fuelling hopes for continued double-digit gross profit growth. He added: “Demand has remained strong and customer behaviour across all segments is normal.”

However, the company’s record of quarterly growth may be under threat due to comparisons with exceptional trading the previous year and the impact of significantly higher pay rises. Watt has also increased the rate of recruitment as Softcat targets “the enormous and growing opportunity” the IT infrastructure market represents.

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These cost factors mean the company’s performance will be second half weighted, with overall operating profit likely to be at levels similar to the year just ended.

Despite Softcat’s record of profits growth being under threat, analysts at Numis Securities focused today on the company’s history of growing market share in both good and bad times. They added that Softcat had significant levers to pull in terms of a flexible cost base should the demand outlook deteriorate.

The broker has a target price of 1,620p and believes a current valuation multiple of 14 times 2023 earnings represents a “good entry point into a market leader with a great track record with years of growth opportunity ahead of it.”

Peel Hunt has a target of 1,673p, while analysts at Jefferies see a 60% upside for shares. However, the latter added: “Tough comparatives and the phasing of costs mean that profits are likely to fall in the first half of 2023. We continue to like Softcat, although the shares may need to clear this comparative for the share price to perform.”

Another FTSE 250 stock on the back foot today was the former Polypipe business Genuit Group (LSE:GEN), which said it now expects profits for the year to be towards the lower end of City expectations.

Its caution reflects tougher trading conditions over recent weeks and the absence of the normal seasonal uplift in volumes in the latter part of the third quarter. This has impacted most parts of the business, particularly repair and maintenance, although the areas that are driven by the need for energy efficiency are trading well.

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Revenues for the nine months to 30 September were £472 million, which represents growth of 4.7% on a strong comparative period and a 3% improvement on a like-for-like basis.

The company, which operates 30 facilities and makes products for heating, plumbing, drainage and ventilation, said it was well positioned to weather the economic uncertainty due to variable manufacturing capacity and significant self-help measures.

Chief executive Joe Vorih added that medium and long-term fundamentals are strong, reflecting factors such as the net-zero commitments of its customers or the need for low-carbon heating solutions and improved building ventilation.

Shares were as much as 5% lower at the top of the FTSE 250 fallers board before later recovering to stand 5p cheaper at 262p. They are down more than 50% so far this year and now trade on about nine times 2022 earnings. Peel Hunt has an “add” recommendation with 370p target price.