Mitie Group (LSE: MTO) was the biggest FTSE 250 riser yesterday. It rose by 7.2% following its latest trading update. It is not hard to see why. The company has upgraded its profit expectations for the year ending 31 March 2022, on better-than-expected revenues so far in the year.
Robust update
Let me share the details. For the third quarter of the current financial year, which is the three months ending 31 December 2021, the company saw a solid 51% increase in revenues compared to the same time last year. A little over 10% of this was from Covid-19-related contracts, which was higher than expected. The company, which provides facilities management services, and that includes cleaning services, saw increased demand in these during the pandemic.
In light of this, the company now expects operating profit of £160m-£165m, up from £145m-£155m earlier. This is the second time in the past year that the company has upgraded its profit forecast! If that is not a reason for the stock to rally, I do not know what is.
Stumbling blocks for the penny stock
On the other hand, I do see two stumbling blocks to further increases in the stock’s price. The first is that the increase due to Covid-19 contracts was a one-time bump up. This might not be present next year, which in turn could reduce the company’s growth. Of course, it is possible that as the recovery gathers pace, the company’s fortunes could stay resilient. But I am not holding my breath. This is especially so considering that the company has run-up losses a couple of times in the past five years.
Next, its share price has already risen quite a bit. The stock is presently trading at a price-to-earnings (P/E) ratio of 34 times, which is fairly high if you ask me. Some of the most robust FTSE 100 stocks are trading at lower P/Es right now. Basically this says to me that the company’s profit increase is probably already priced in. This in turn means there is limited scope for its stock price to rise.
Also, its share price is still way below its pre-pandemic levels. If it were really on a rising curve, I think it would have moved way past by now given the strong showing in its financials. To be fair, part of the ostensible decline is because it had a rights issue in July 2020. This reduced its per share price in one go. However, it has had plenty of time since to recover, which has not happened. In the last six months, in fact, it has fallen. Added to this is its elevated P/E, which makes it hard for me to imagine that the stock has won investors’ favour.
Would I buy the FTSE 250 stock?
I still think this is a good stock for me to buy for the long term. But just to get a better idea of where it is at, I will wait until the next financial release to figure out a good time to buy it.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
