The company has been hit by scandals over failing to provide enough security guards for the Olympics and, more recently, allegations that it improperly charged the state on a prisoner tagging contract.
These events have put the share price under pressure in recent months, as investors worry it will struggle to gain new contracts and its reputation took a hit.
According to data from FE Analytics, the stock is more or less flat year-to-date, while the FTSE All Share has risen by 19.57 per cent.
Performance of stock vs index in 2013
Source: FE Analytics
After the Olympics scandal in July of last year, the stock recovered its level prior to the revelations, but the more recent allegations, currently being investigated by the Serious Fraud Office, have proved harder to shake off.
Performance of stock vs index over 2yrs
Source: FE Analytics
The weight hanging around the company’s neck continues to be insecurity over its future contracts. The prime minister David Cameron suggested companies with a “broken” culture could even be banned from Government contracts in the future.
It is important to recognise that even last year, only 24 per cent of the company’s revenues came from the UK. Europe was responsible for another 24 per cent, the Americas (including North and South) 28 per cent and Asia 17 per cent. Africa was the source of 7 per cent of revenues.
It remains one of the world leaders in a growing industry, with 8 per cent of its market as of last year, and the company’s recent update was bullish on future growth.
Estimates cited by the company forecast the global security market will expand by 7.3 per cent between 2011 and 2016.
Growth in emerging markets is forecasted to be even stronger, and G4S is quickly expanding into this sector. The company aims to derive 40 per cent of its sales from emerging markets by 2016.
G4S management is forecasting 5 to 8 per cent organic growth [which does not include the extra revenue gained by taking over companies] a year and says it had a contract pipeline of £5bn as of the end of last month.
Current trends are in line with those expectations, according to the latest figures. In the nine months to 30 September, revenue grew by 6.4 per cent. Profits were the same as last year.
One of the key attractions of the company is its exposure to emerging markets, where recent scandals are less likely to have taken their toll.
In a strategy update this week, the company said it would focus on emerging markets, with Brazil, India and Africa the key regions.
The company’s African division will have its own dedicated management team, while Latin American operations will be run by an executive based in the region rather than from the US.
Overall, the markets weren’t impressed with the company’s strategy update, however.
New chief executive Ashley Almanza said the company was considering disposing of 35 underperforming divisions which generated £400m of last year’s £7.3bn revenues. However, the company’s core strategy will remain the same.
Almanza also signalled that G4S will move away from acquisitions as a source of growth, saying that they can be disruptive to management.
Graham Spooner (pictured), analyst at The Share Centre, says this is a recognition that the company has built up too much debt by making acquisitions at inflated prices. "They are blaming past management, but their acquisitions were greedy and were too quick. Their debt situation is ugly. But with the business's strength, they think they should be able to trade their way out of it."
Total liabilities stood at £1.49bn in June compared with total assets of £5.55bn. The liabilities rose from £1.48bn six months earlier. The company paid £88m in interest in that six-month period, up from £47m six months previously.
"I think there’s little to go for in the short or medium term," Spooner said. "Long-term attractions remain, but on the way there are a lot of risks."
"If I didn’t have a 'hold' rating I would be more of a seller. If I had them in a portfolio I would probably hold on, but I wouldn’t buy them."
"If I had them as a major part of my portfolio or I held very few stocks, I would probably sell."
A number of investors have taken a contrary view. One of the major shareholders is Tweedy Browne, a well-respected American value investment firm. It holds 5.1 per cent of the company.
Bill Gates bought 6.5 million more shares in the summer to create a total holding worth 3.2 per cent. The company is also a major holding of contrarian FE Alpha Manager Neil Woodford, former head of UK equities at Invesco. Invesco holds 16 per cent of the company.
So why are these investors taking a different view?
G4S is operating in an industry that seems likely to grow in the coming years and decades. The pressure on governments to reduce their outgoings and debt is supportive of further outsourcing.
The UK Government has even sold contracts for army recruiting to private companies, as well as a number of services in the welfare state that aim to get people back into work.
There’s clearly a long-term case to be made for the company, but this stock is one for the brave.
In a recent article, FE Trustnet examined the investment case for Tesco, Rio Tinto and oil companies BP and Shell.
