FTSE 250 incumbent Softcat (LSE:SCT) has been on a growth trajectory for a few years now. I still think it can grow further, so I’d add the shares to my holdings at current levels and hold them. Here’s why.
IT infrastructure supplier
Softcat sells IT infrastructure to public and private sector firms through four main areas. These are cyber security, IT intelligence, hybrid infrastructure, and digital workspace tools. It partners up with many tech giants who manufacture but don’t sell directly to businesses, and makes money by adding value to its customer base with these products and services.
As I write, Softcat shares are trading for 1,591p. At this time last year, the shares were trading for 2% less at 1,560p.
FTSE 250 stocks have risks
One of the main issues Softcat could face is competition. The IT reseller market is large and very competitive. I know this due to my research and the fact I have worked in this space myself some years ago. All the firms in Softcat’s sector are competing for the same business and looking to sign up businesses they can then sell their products and services into.
At current levels, Softcat shares could be considered a bit expensive. The shares are currently trading with a price-to-earnings ratio of 33. This worry me as a lack of continued growth and performance or negative news could affect the share price negatively.
Why I like Softcat shares
Softcat pays a dividend that could make me a passive income. It currently sports a dividend yield of over 2%. The FTSE 250 average dividend yield is currently very similar at just under 2%. I do understand that dividends can be cancelled, however.
I mentioned earlier Softcat has an exceptional track record of growth. I understand that past performance is not any form of guarantee for future performance. Looking back, however, I can see that total revenue and gross profit have increased year on year for the past four years.
Coming up to date, Softcat’s recent performance has been good too. A Q1 update released last month mentioned revenue, gross profit, and operating profit grew compared to the same period last year. Cash generation was also in line with expectations.
As well as performance, Softcat is a major player in a growth market. Many businesses have still not undertaken the digital transformation required to continue operating in current tech-savvy times. The pandemic did hasten the need for such digital IT tools and benefitted Softcat and its performance. Continued demand should boost Softcat’s performance in the coming years. This could help increase any returns I hope to make.
Overall I’d happily add Softcat shares to my portfolio. I believe Softcat is a major player in a burgeoning growth market and can benefit from the continued demand due to the need for digital transformation. It has a good track record with recent trading looking positive too. A dividend is a bonus that could help me make a passive income.
Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Softcat. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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