On Friday, UBS downgraded Serco Group PLC (LON:SRP:LN) (OTC: SECCF) from a Buy to a Sell rating, adjusting the price target to GBP1.40 from the previous GBP2.20. The change in rating is based on the anticipation that Serco's earnings growth may stall due to challenging government spending trends. The firm has been favorable towards Serco's performance over the past seven years, acknowledging the company's strong earnings growth during its turnaround phase.
The downgrade follows a new analysis that includes revised modeling of key contracts and order book intake. This has resulted in an estimated 10-15% cut in earnings per share (EPS) for the fiscal years 2025 and 2026. Despite identifying areas of growth, such as in the US Defense sector, UBS projects a period of slowing contract momentum and margin consolidation for Serco.
UBS forecasts zero percent earnings growth for Serco over the next three years, which has influenced the decision to lower the price target and adjust the stock rating. The firm notes that Serco is currently trading in line with its mix-weighted peer average, despite the projected weaker earnings outlook.
The revised rating and price target reflect UBS's assessment of Serco's future financial performance in light of the anticipated market conditions and internal challenges the company may face. The firm's outlook suggests a cautious stance on Serco's stock for the near future.
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