Serco Group (LSE: SRP) was the highest gainer within the FTSE 250 index at the moment (15 Could). The UK inventory spiked as a lot as 7% in morning buying and selling, bringing the year-to-date return above 20%.

As I kind although, the every day achieve has pulled again a bit to five%.

Long run, Serco inventory has been disappointing. It’s down 63% over the previous 15 years, regardless of doubling from a multi-year low in November 2018.

So why the rise?

Serco is a multinational outsourcing firm that gives public providers throughout numerous sectors, together with defence, transport, well being, justice, and immigration. It has its fingers in quite a lot of pies. 

At this time, the corporate introduced that it has bagged three contracts price over £1bn from the Ministry of Defence to supply maritime providers for the Royal Navy. These embody delivering port providers and serving to introduce 24 new navy vessels, in addition to numerous maritime coaching assist providers. 

After a number of up-and-down years, Serco appears to be discovering its groove. Different current defence wins embody a 10-year contract to hold out a joint recruitment service for all UK navy personnel, and a $247m deal to assist soldier readiness and efficiency inside the US Military.

Whereas final yr’s income was mainly flat at £4.8bn, order consumption grew 7% to £4.9bn, giving a complete order guide of £13.3bn. Underlying earnings per share (EPS) elevated 9% to 16.7p, whereas it carried out a £140m share buyback and hiked the dividend by 22%.

Valuation

In the meantime, the valuation doesn’t look too demanding. The ahead price-to-earnings ratio is round 11, which is fairly affordable.

Nevertheless, the forecast dividend yield at the moment stands at a modest 2.6%, so I’d be hoping for future share price features to make this inventory price shopping for.

On that entrance, there ought to be loads of development alternatives for Serco over the subsequent few years, particularly in defence and immigration. It entered 2025 with the very best degree of potential new work in additional than a decade, at £11.2bn.

That stated, it’s nonetheless on the mercy of presidency contracts. Final yr, it misplaced a long-standing contract to handle Australia’s immigration detention centres. So contract losses are an unavoidable threat right here.

Ought to I purchase?

The agency has usually garnered destructive headlines as a result of politically delicate areas wherein it operates. Excessive-profile scandals previously have included overcharging the UK authorities for digital tagging of offenders, and allegations of mistreatment in some immigration detention centres.

The corporate has labored exhausting to enhance its fame, and it undoubtedly does quite a lot of good work in holding important public providers working.

Nevertheless, it’s at the moment on the coronary heart of one other extremely politicised challenge within the UK. That’s managing non-public lodging for over 30,000 asylum seekers throughout England.

To facilitate this, Serco is providing non-public landlords five-year assured lease agreements, even when the property is vacant. Whereas this makes monetary sense fairly than paying for pricey resort lodging, which the agency likewise helps handle, it’s additionally controversial. Some native councils and MPs are resisting, with Serco changing into a little bit of a political lightening rod.

Weighing issues up, I don’t really need all this baggage in my portfolio, particularly when Serco’s revenue margins are fairly low at round 3%-4%. So it’s a move from me on this one.