Morningstar | ITRK Updated Forecasts and Estimates from 24 Sep 2018
Over the past two years, the market has witnessed an astounding rerating of Intertek stock, with shares rising almost 70% over the period. A new CEO, currency tailwinds, and a marketing strategy to highlight the high-growth nature of the company’s core products business, which generates almost 60% of revenue and 80% of operating profits, have all helped this cause. Investors have looked through the current malaise in Intertek’s commodity-based businesses and bought into the 5.5%-plus top-line growth story in the consumer business. As a result, expectations among investors are high. The first-half results released on Aug. 7--with organic revenue growth of 3.9%, a decline of 1.8% at actual exchange rates, and operating margins improving by 50 basis points year over year--are far from disastrous, but in light of heightened expectations, they have led to disappointment. We do not expect to make any material changes to our forecasts on the back of these numbers, however, and reiterate our narrow moat rating and GBX 3,900 fair value estimate. We believe the shares remain overvalued.Flagship division products continued its strong run, with organic revenue growth of 5.7%, in line with (if not slightly ahead of) the level of growth we have witnessed over the past few years, while operating margins ticked up by 80 basis points to 21.3% year over year. Trade was one area of surprise in the results, with organic revenue growth of 0.7% and margins declining by 60 basis points to 13.4% as lower export activities and admittedly tough comps affected the agri business. Lastly, the resources business, which has declined by double-digit growth on average over the past two calendar years, actually saw an improvement over the period. While margins still ticked down by 40 basis points to 5.5%, revenue declines slowed to just negative 0.7% as the mix slowly shifted away from activities exposed to energy capital expenditure to other growing areas within the business.
Intertek Group provides Assurance, Testing, Inspection and Certification (ATIC) services. Co.'s segments comprised of Products, Trade and Resources. Co.'s products-related division consists of business lines that are focused on quality and safety of physical components and products, as well reducing risk through assessing the operating process and quality management systems of its customers. Co.'s trade division consists of three Global business lines, Cargo & Analytical Assessment, Government & Trade Services, and Agriculture business. Co.'s resources division consists of two business lines, Industry Services, and minerals business.
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