This undervalued FTSE 250 stock could do well in the AI boom

Concept of two young professional men looking at a screen in a technological data centre

There are a number of FTSE 250 stocks I’ve got my eye on right now. But one that looks particularly interesting to me is Keller Group (LSE: KLR). It operates in the construction industry. And I think it could potentially be a major beneficiary of the artificial intelligence (AI) boom in the years ahead.

An under-the-radar AI play

The AI boom is likely to lead to a lot of construction activity over the next decade.

For starters, semiconductor companies are going to be building huge manufacturing plants to cater for the high demand for AI chips.

Recently, Intel, Samsung, and Taiwan Semiconductor have all advised that they will be building massive plants in the coming years (supported by US government funding).

Additionally, hyperscalers (large cloud services providers) are going to be building data centres to house the enormous amount of data that AI requires.

Here in the UK, Google is planning to build a giant data centre on a 33-acre site in Waltham Cross, Hertfordshire (at a cost of about $1bn).

All this construction activity should provide a supportive backdrop for Keller. A geotechnical engineering company, it specialises in getting ground ready to build on. So, it could potentially play a pivotal role in the AI boom in the years ahead.

A cheap stock with a nice dividend

Looking beyond the AI story here, I think there’s a lot to like about Keller from an investment perspective.

In 2023, the group set new records for revenue and underlying operating profit. Meanwhile, return on capital employed – an important measure of profitability – was the highest in 15 years.

The stock is still very cheap today, however. With analysts forecasting earnings per share of 139p for 2024, the forward-looking price-to-earnings (P/E) ratio is just 8.2.

At that earnings multiple, there’s plenty of scope for an upward re-rating in the valuation if growth picks up.

Looking at dividends, this year the company is expected to pay out 47.7p per share to investors. That equates to a yield of about 4.2% at today’s share price.

It’s worth noting that the company recently hiked its full-year dividend by 20%. That large increase is encouraging – it suggests that management is very confident about the future.

Finally, the stock is in a strong uptrend right now.

I’d much rather buy a stock that is trending up than one that is trending down.

That’s because trends tend to remain in place for a while. As my old boss used to say: “The trend is your friend”.

Attractive risk/reward set-up

Now, it’s worth pointing out that construction is a cyclical industry. So an economic downturn could present some challenges for Keller.

Other risks here include project delays, safety incidents, and cost overruns.

All things considered, however, I think this FTSE 250 stock has a lot going for it.

If I didn’t already have a decent-sized position in construction equipment rental company Ashtead (which is also well placed to benefit from the AI boom), I would definitely consider buying Keller shares.

The post This undervalued FTSE 250 stock could do well in the AI boom appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Ashtead. The Motley Fool UK has recommended Taiwan Semiconductor Manufacturing. 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.