Wednesday tips round-up: Capita, Spirent Communications

8th Oct 2014 19:07

Investors chasing returns and growth from outsourcer Capita have been ignoring one glaring warning sign, if not more. The company's return on capital has been tumbling for the past seven years. Capita has delivered growth in revenues and earnings in the last decade, pole-vaulting the shares fourfold higher, but as a result the balance sheet is much the worse for wear, recent results showed large losses on disposals and goodwill write-downs, and net debt has soared.Other warning signs for investors include the departure this year of its long-timer managing director, a cash call, and the largest balance sheet asset being intangibles from acquisitions. There is no doubt that growth continues apace, but "investors often end up paying a high price for growth when they myopically focus on earnings per share". Capita's shares trade on high multiples of assets and forecast earnings, which "looks unwarranted given the high debt levels, falling returns and warnings signs for investors", says the Telegraph's Questor.Recent results from Spirent Communications offered crumbs of encouragement but the "notoriously volatile telecoms tester swept them off the table yesterday", says Tempus in The Times, after the telecoms testing company warned that trading conditions had "softened" in the US and China.New chief executive Eric Hutchinson "already has an eye on the exit" as the credibility of his strategy and investment plan is looking "wobbly" after his August boast of "momentum" towards the objective of a return to growth this year before this week's 20% downgrading of profit expectations. Tempus advises avoiding due to "doubts over strategy and management commitment".