Yahoo Finance This stock still offers good value for money after its 43pc share price rise
The FTSE 100’s lacklustre performance over recent years means the task of unearthing cheap stocks is fairly straightforward. Indeed, the large-cap index has risen by just 10pc over the past five years.
By contrast, other major global indices such as the S&P 500 are up 78pc over the same period.
Of course, cheaper stocks are not necessarily better investments. Low-quality companies often trade at depressed prices for good reason, with them habitually offering relatively limited potential for dramatic earnings growth.
As a result, Questor would rather pay a higher price to obtain better quality companies – even while a long list of FTSE 100 shares continue to trade at bargain basement levels.
For example, our recommendation to purchase shares in London Stock Exchange Group (LSEG) in February last year was understandably met with incredulity by some readers. Its price-to-earnings (P/E) ratio of over 31, at a time when many large-cap stocks had earnings multiples of less than a third of that figure, suggested it lacked capital growth potential.
Since then, though, the company’s shares have surged 43pc higher and outperformed the FTSE 100 by 41 percentage points. Somewhat counterintuitively, they now trade on a lower P/E ratio than at the time of our initial tip, albeit with a figure of 29 still highlighting their vastly premium valuation vis-à-vis the wider index.
The business’s financial performance has proved to be sound. Its latest quarterly trading statement showed that total income rose by 8pc and it is on target to deliver full-year growth towards the upper end of previous financial guidance. Although earnings per share are forecast to rise by just 3.5pc this year, they are then expected to grow at an annualised rate of 12pc over the next two financial years.
While this column generally takes a somewhat cynical view of forecasts, in this instance they serve to highlight the growth potential offered by the company.
Its profitability may seem somewhat surprising, given the lack of primary and secondary market activity during the ongoing global economic slowdown. In addition, the UK stock market has been berated by seemingly every investor with a soapbox over recent months as a variety of companies have chosen to list elsewhere.
However, revenue from the firm’s capital markets division accounts for just 19pc of total sales. The company’s dominant segment is data & analytics, which continues to benefit from structural growth trends including automation, passive investing and regulatory change.
Its strong performance has allowed share buybacks totalling £1.5bn to be made since August 2022. Dividends, meanwhile, rose by 13pc last year. A yield of 1.2pc, however, is unlikely to pique the interest of many income investors.
LSEG’s acquisition of Refinitiv, which prompted concern among investors and a declining share price prior to our original tip, has proved to be a sound purchase thus far.
As a reminder, it provides access to global data and analytics growth opportunities, with run-rate cost synergies of nearly £400m expected to be achieved by the end of the current year.
A 10-year partnership with Microsoft, which now has a 4pc stake in LSEG, that is focused on artificial intelligence and automation has similar potential to positively catalyse the company’s bottom line.
An improving global economic outlook could also boost earnings. The end of an era of high inflation and interest rate rises is now well within reach.
With US, eurozone and UK interest rates set to materially decline over the coming years, the prospects for the company’s operating conditions, and investor sentiment towards its shares, are extremely likely to improve.
In the meantime, the firm’s business model is relatively robust. Around 72pc of its revenues are recurring, which provides greater stability compared with many FTSE 100 index peers, while its net gearing ratio of 20pc shows that its balance sheet is very modestly leveraged.
Indeed, net interest costs were covered nearly eleven times by operating profits in the first half of the current year.
Clearly, some investors will continue to shun LSEG based on its high valuation. In Questor’s view, however, the company’s shares continue to be worthy of their premium price. A solid financial position, strong growth potential and an improving global economic outlook mean there is scope for further capital gains.
Questor says: buy
Ticker: LSEG
Share price at close: £92.48
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