Questor is The Telegraph’s stock-picking column, helping you decode the markets and offering insights on where to invest
While the FTSE 100 has been busy making new record highs over recent months, the share price of London Stock Exchange Group (LSEG) has fallen heavily. The financial data firm’s shares have slumped by 20pc in the past six months and, in doing so, have underperformed the UK’s large-cap index by 23pc.
This is despite the FTSE 100 company recently releasing an upbeat set of half-year results that showed it is making encouraging overall progress. The firm reported that all of its divisions performed well and delivered positive sales growth. This prompted a near 8pc rise in revenue during the period, with an improving profit margin contributing to a rise in earnings per share (EPS) of over 20pc.
The company anticipates that its profit margin will continue to rise, increasing financial guidance for the full year as a result. While it previously forecast its earnings before interest, tax, depreciation and amortisation (Ebitda) profit margin would rise by 50-100 basis points this year, it now expects it to increase by 75-100 basis points. This suggests that its competitive position is improving, which bodes well for its long-term financial performance.
In terms of earnings forecasts, the company is expected to grow its bottom line at an annualised rate of 10pc over the next two financial years. Its EPS is set to benefit from a further share buyback programme that was announced alongside its half-year results. The firm plans to repurchase £1bn of shares over the coming months following the completion of a £500m share buyback programme in the first half of the current year.
Alongside margin growth and the effect of share buybacks, the firm’s EPS should benefit from an improving global economic outlook. Certainly, the near-term prospects for the world economy remain uncertain amid elevated geopolitical risks, persistently tight monetary policy in the US and inflation that is proving to be far stickier than many investors had previously anticipated.
But as the era of above-target inflation gradually dissipates, further interest rate cuts are likely to boost primary and secondary market activity and bolster the company’s financial performance. With structural growth trends such as passive investing, regulatory changes and artificial intelligence remaining in place, the firm’s long-term growth potential remains upbeat.
LSEG’s solid financial position means it is well placed to both invest in such long-term growth opportunities and also to engage in M&A activity. Net gearing at the time of its half-year results, for example, amounted to just 28pc, while net interest costs in the first six months of the current year were covered over 15 times by operating profits. Both figures suggest it can easily afford to take on substantially more debt than at present.
Given the company’s strong recent financial performance, excellent fundamentals and upbeat growth outlook, it is somewhat surprising that its share price has been exceptionally weak over recent months. It acts as a further reminder, should it be needed, that the stock market is not efficient and can present buying opportunities for long-term investors who are willing to adopt a contrarian view.
Indeed, LSEG’s recent share price decline means investors can now buy a high-quality company at a much more attractive price than just six months ago. The firm, of course, still trades on what many investors would consider to be a rather rich price-to-earnings (P/E) ratio of 25.8. However, in Questor’s view, the company is worthy of a significant premium vis-à-vis the wider FTSE 100 index as a result of its solid balance sheet, improving competitive position and double-digit earnings growth prospects.
The company’s P/E ratio is also lower than it was at the time of our “buy” recommendation in February 2022. Back then, LSEG traded on an earnings multiple of 31.2. Yet, its shares have subsequently risen by 45pc, even after factoring in their recent decline, which equates to an annualised capital growth rate of around 11pc. In doing so, the stock has outperformed the FTSE 100 by 27pc.
While further share price volatility cannot be ruled out in the short run, the company offers scope for strong capital growth and substantial index outperformance over the long term. Keep buying.
Questor says: buy
Ticker: LSEG
Share price at close: £93.80
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