The S&P/ASX 200 Index (ASX: XJO) stock Johns Lyng Group Ltd (ASX: JLG) could be a top buy right now, in my eyes.
This industrial company has been more volatile in the last few months than I would have expected, but I like the valuation, though there is some uncertainty after the Four Corners program issue.
The heavy decline after the FY24 result was surprising to me, considering the seemingly relatively defensive and essential nature of what it does. It provides building and restoration services across Australia and the USA. Its main service is rebuilding and restoring various properties and contents after damage by insured events, including impact, weather, and fire events.
What sort of customers does this company have? Its main clients include major insurance companies, commercial enterprises, local and state governments, body corporates/owners' corporations and retail customers.
Some of the ASX 200 stock's work is specifically focused on providing help and services after catastrophe events, which was somewhat quiet in FY24.
What has gone wrong recently?
As we can see on the chart above, the Johns Lyng share price has dropped over 30% since 26 August 2024, when the business reported its FY24 result. Investors were seemingly disappointed that the company was guiding that overall revenue and operating profit (EBITDA) would decline because of a large drop in its catastrophe operations.
I like to highlight stocks that I think are opportunities. I think this is the right time to invest in this ASX 200 stock for a couple of key reasons. One is a shorter-term factor and another is a longer-term reason. I'll start with the short-term reason.
Catastrophe earnings to bounce?
The weather is not predictable nor consistent each year, so it's not necessarily surprising that Johns Lyng is expecting to see a reduction in earnings in FY25.
But I think the market may be pricing the ASX 200 stock as though it can't see any recovery of catastrophe earnings in future years. Over the long term, it's quite possible that more expensive storms could occur due to climate change.
But I think it's possible Johns Lyng could see a short-term bounce on earnings. Two very damaging hurricanes have hit Florida recently, including Helene, the strongest hurricane to hit that area in over 170 years.
Readers may also remember that Johns Lyng was recently chosen to join Allstate's emergency response and mitigation panel. This panel gives access to a potential 16 million Allstate policyholders throughout the US and covers the provision of emergency response makesafe, and water mitigation.
As noted by the Insurance Information Institute, in 2023, Allstate was the second-biggest writer of homeowners insurance in the US. Johns Lyng may see an uptick in work following these hurricanes and/or possibly future damaging storms in Australia.
Longer-term growth initiatives
I think this business' long-term prospects look promising, which is why I'm invested in the ASX 200 stock.
It is regularly winning new contracts, such as the Allstate success in the US.
The company has shown interest in expanding into new countries, such as its recent progress in New Zealand. In the long term, expanding to other countries, such as Canada, could also make sense.
Johns Lyng regularly makes acquisitions to boost its positions in different markets, such as the recent acquisition of Keystone Group, one of Australia's leading insurance building and restoration service businesses.
Its core business continues to grow at a good pace, even if the catastrophe earnings aren't. FY25 business as usual (BAU) revenue is expected to increase 15% to $1.07 billion, and BAU operating profit (EBITDA) is expected to rise 7.2% to $119.2 million. If underlying profit keeps rising, then the Johns Lyng share price could rise over time, too.
According to the forecast on Commsec, the Johns Lyng share price is valued at 20x FY25's estimated earnings and 18x FY26's estimated earnings. This is an attractive price to invest at, in my opinion.
