When we wrote about total quality assurer Intertek in late-2020, the stock was hovering near all-time highs around 5760 pence a share. The company’s long history, consistent financial results and market position were seemingly giving investors little to worry about. Apparently, many were willing to pay 35 times earnings for a company with little to no growth in recent years. We weren’t, especially after seeing ITRK’s weekly chart below, shared with readers on December 28th, 2020.
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It revealed that Intertek ‘s uptrend since 2002 was now a complete five-wave impulse, labeled (1)-through-(5). The five sub-waves of (1) and (3) were visible, as well, while wave (4) was an expanding flat correction. The post-pandemic rally to the vicinity of 6500 pence a share was the final wave (5). According to the rules of the Elliott Wave theory, a three-wave retracement was supposed to follow.
In addition, there was a bearish RSI divergence between waves (3) and (5), highlighting the bulls’ exhaustion. This led us to conclude that “5760 pence is a risky price to pay for ITRK stock right now.” And since corrections usually erase the entire fifth wave, we thought “a drop to roughly 3800 pence a share can be expected.“
Less than two years later now, Intertek closed at 3641 pence a share last week. This translates into a decline of 2119 pence a share or 36.8% in 22 months’ time. Unfortunately for the bulls, we still don’t think Intertek stock is cheap enough now. The company is on track for approximately £3B in revenue this year. On a ~15% operating margin, 27% tax rate and ~£130m in CapEx, it is expected to make roughly £200m in free cash flow.
The problem is that despite the recent fall in the stock price, this is still a £5.8B company. In other words, Intertek trades at a P/FCF multiple of 29. This is a high-growth company’s multiple, very inappropriate for a business that’s grown sales by a total of less than 10% in the past five years. So, instead of seeing a bargain, we still view Intertek as an expensive and therefore very risky investment. The stock can easily keep sliding towards the 61.8% Fibonacci support area near 2500 pence a share. That is another ~30% to the downside, regardless of the notable wave (b) recovery, which might first occur.
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