Is now the time to buy Moneysupermarket.Com Group plc ahead of a “record year”?

Can star performer Moneysupermarket.com Group plc (LON:MONY) continue to grow, or is it time for shareholders to take profits?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of Moneysupermarket.Com Group (LSE: MONY) rose by 7% this morning, after the price comparison giant advised investors that it’s “on track for a record year.” Revenues rose by 13% to £76m during the third quarter, thanks to strong growth in insurance, credit cards and loans.

Of course, Moneysupermarket’s relentless growth means that since at least 2010, every year has been a record year. The real question for investors is what will happen when growth starts to slow. The latest broker forecasts suggest this process could start in 2017.

In this article, I’ll take a closer look at the trading update and valuation. I’ll also look at another successful internet stock, whose track record provides some clues about what Moneysupermarket’s incoming chief executive might do next.

Growth could surprise

Outgoing chief executive Peter Plumb said today that the group’s technology platform “is allowing innovative services to be pioneered” and that “many more households” will benefit from the group’s services in the years ahead.

Mr Plumb has overseen a 400% rise in the firm’s share price since he took charge in 2009, but he’s leaving in May 2017. He will be replaced by Mark Lewis, who is currently retail director at John Lewis.

Market analysts expect Mr Plumb’s departure to coincide with slower earnings growth. Consensus forecasts suggest earnings per share will rise by 26% this year, but forecasts for 2017 indicate EPS growth of just 8%.

My experience as a consumer suggests that the price comparison sector is more mature than it was a few years ago. But this won’t necessarily prevent profits rising at Moneysupermarket.

The group’s operating margin has risen from 13% in 2011 to a record high of 30% during the first half of this year. Growth has also driven by higher profit margins and stronger cash generation. Moneysupermarket ended last year with net cash of £16.7m, despite making a final payment of £20.6m on its 2012 acquisition of MoneySavingExpert.com.

I suspect that in the absence of major acquisitions, Moneysupermarket is likely to use a combination of share buybacks and dividends to lift earnings per share and accelerate shareholder returns.

The shares already offer a forecast yield of 3.5%, rising to 4% in 2017. In my view shareholder returns are likely to continue rising, making the shares a medium-term buy.

This is how it’s done

If you’d like to see how businesses that generate a lot of surplus cash can use this to reward shareholders, then look no further than property website Rightmove (LSE: RMV).

During the first half of this year, Rightmove used dividends and buybacks to return 82% of its operating profit, or £66m, to shareholders. The company doesn’t need to fund acquisitions or expansion — all it needs to do is maintain the IT and marketing expenditure needed to protect its current position.

Rightmove has used share buybacks to reduce its share count from 111.4m during 2010 to just 93.8m today. These buybacks alone have provided shareholders with an 18.7% rise in earnings per share over the last six years.

Rightmove has delivered outright profit growth on top of this, of course, but these numbers show how useful buybacks can be for companies with genuine surplus cash. Only time will tell if Mark Lewis follows this path.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com and Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »