Stockwatch: A big spender worth buying

Can Moneysupermarket.com continue to outperform? 2015 results for this mid-cap price comparison group show all-round double-digit progress as policy-switching catches on among consumers. Assuming it's a durable social trend, then the shares continue to rate a 'strong hold' or 'buy-on-dips', despite valuation metrics pricier than past years.

Several brokers target upside from 335p to near 400p, a rise that would take considerably longer than the excitement in cyclical stocks amid risk-on/risk-off - assuming you can be positioned on the right side of sentiment swings.

This business may better stave off your gaining grey hairs. The table shows analysts broadly expecting a moderation in growth for 2017, but that's plenty far away and the company has overcome caution before.

Scotching doubts for a third time?

When the group floated at 170p in August 2007, it was branded a flop by the financial press as the price dropped to 157p: bosses were cashing in and the sector would become over-competitive, they said. Yet a firm five-year chart, from about 100p to a recent 337p peak, implies intrinsic strengths.

Questions arose over slower mid-year revenues when I first drew attention at 145p in October 2013, but on fundamental and technical criteria, the stock looked attractive. Its price/earnings (PE)-to-growth (PEG) ratio was 0.7 - where you are generally looking for sub-1.0 - and the prospective yield was 5%. Chart-wise, the stock had fallen to a support level in a head-and-shoulders pattern with an open gap at 200p, implying such a near-term regain.

Considering Moneysupermarket's financial statements, payout growth should be durableCurrently the PEG ratio is below 1.0 in respect of 2016, but then (according to forecasts) becomes an unattractive 2.9 for 2017. A 3% yield compares with plenty fatter elsewhere.

But PEGs can vary smartly according to forecasts or outcomes, and 2017 is anyone's guess. Dividend payout ratios have reached the highest since 1993, with FTSE All-Share companies currently paying out 70% of earnings.

It remains to be seen whether this proves sustainable or if boards are forced to re-appraise according to economic conditions and debt. Moneysupermarket's dividend cover of 1.6 times implies a payout ratio of 63% and, considering its financial statements, the payout growth should be relatively durable.

Insurance concerns

2015 has seen a 14% rise in group revenue and a 15% rise in adjusted operating profit. The mainstay of this was Moneysupermarket.com, which saw revenue up 14% to £250.1 million, followed by growth at the much smaller Travelsupermarket.com, which rose up 8.4% to £24.5 million.

The 2012 acquisition Moneysavingexpert.com enjoyed a 34.6% rise to £30.7 million. Its operating profit jumped 41.7% to £21.4 million in £101.1 million group context, helped by credit cards, current accounts and utilities.

The Insurance side saw a 5% annual decline despite 8% revenue progress in first-half 2015An operating profit break down is lacking, but the figures imply Moneysupermarket.com ceding margin.

Its Money side enjoyed a 23% revenue increase to £72.4 million, helped by current account switching and with credit-related products (including mortgages) also ahead.

However, the Insurance side saw a 5% annual decline, despite 8% revenue progress in the first half of 2015, as rivals spent more on marketing for car and home insurance. Several insurance companies own price comparison sites e.g. Admiral with Confused.com and Budget with Compare the Market.

Towards the year-end new technology channels went live, so it will be interesting to see if this can redress the balance. £19.6 million was invested in 2015 amid a three-year programme to develop data capability, build a new aggregation engine and upgrade the customer experience - e.g. in digital/mobile.

A sceptical view is that Insurance becomes a drag, with competition increasing as fearedThe lower trend is persisting: the first two months of 2016 showing Insurance revenue down 4% and travel (car hire, flights, hotels) also deteriorating - albeit in the context of 12% revenue growth overall.

Home Services is a bright spot, with 2015 revenue up 68% to £37.5 million, and Moneysavingexpert.com continues to bolster the group. So the situation in Insurance needs watching, given it represented half of 2015 group revenue. 

The 2015 gross margin edged up from 78.9% to 80.0%, helped by more customer visits. However, administrative costs rose 23% to £91.1 million due to higher headcount and share-based payments. Other costs, such as technology amortisation, premises and professional, also rose, but the normalised operating profit margin edged up 0.9% to 35.5%. 

Upgrades suggest 20% upside

A sceptical view is that Insurance becomes a drag, with competition increasing as was the long-term fear. However, the group has overcome variations before, Moneysavingexpert.com is substituting the shortfall and management is confident in 2016 projections.

Investec Securities re-iterates 'buy' with a 400p target, JP Morgan Cazenove and Barclays Capital are both 'overweight', targeting 393p and 390p respectively. Peel Hunt retains 'hold' with a 340p target and only Numis advises 'sell', targeting 225p as of last October.

The operational cash flow profile supports further growth in underlying value and payouts. Not to emphasise such forecasts, but note how sentiment is supportive - as if the market is seeing through the weakness in Insurance to recognise that price comparison will continue to grow more significant in consumer behaviour and Moneysupermarket.com is the means of equity exposure. 

Even in a Brexit scenario of consumers' hesitation, people must still renew key financial policies and are not going to stop holidaying. There is risk to 2016 expectations from the Insurance side, but, in the overall context, a shortfall would more likely provide a buying opportunity.

Strong balance sheet

The table shows negative net tangible assets, as a result of £163.9 million intangibles - not surprising for a business with high elements of goodwill, customer relationships and technology.

There is presently no debt after £30 million was paid off, however, a new three-year revolving credit facility of £100 million has been agreed, with scope for an additional £100 million. Net finance costs only clipped 8% of 2015 operating profit anyway.

Operational cash flow rose 15.4% to £96.9 million, enabling £42.9 million investment and £45.0 million distributed via dividends, also paying down debt. Such a profile supports further growth in underlying value and payouts. 

The risk/reward profile therefore continues to look favourable for patient investors.  

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.