Shares of price comparison firm Moneysupermarket.com Group (LSE: MONY) rose by as much as 9% on Thursday morning, after the group revealed plans to enter the mortgage market and announced a 5% increase in half-year profits.
Moneysupermarket’s growth has slowed over the last couple of years, but in my view this business remains likely to outperform the wider market over time. In this article I’ll explain why I’m bullish about this stock and highlight another FTSE 250 firm I rate highly.
Investing for growth
Today’s figures show that Moneysupermarket’s revenue for the first half of the year rose by 5% to £173.7m. Pre-tax profit climbed 5% to £42.5m. This profit was matched by operating cash flow of £43m, lifting the group’s net cash balance by 38% to £24.4m.
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This company is currently investing in its next generation of technology and services. Its Reinvent programme is expected to deliver more personalised app-based services and include mortgage price comparison for the first time.
In today’s update the group announced the formation of a new company, Podium. This will be run as a joint venture with the founders of HD Decisions, a company that provides much of the technology used for credit card and loan comparison.
Is this the best price to buy?
Moneysupermarket shares have never looked cheap compared to earnings. But the group’s high profit margins mean that this isn’t necessarily a problem.
Today’s results show that the group has delivered an operating profit margin of 29.1% and a return on capital employed of 54% over the last 12 months. Both of these figures are very high indeed.
In my view, today’s forecast P/E of 20 and dividend yield of 3.2% look like a decent entry point for such a profitable business. I’d be happy to buy more stock for a long-term position at this level.
Super profits from travel
Another company with a long history of generating high returns is newsagent WH Smith (LSE: SMWH). This Swindon-based group has been selling newspapers and sweets for more than 225 years, but its business is changing.
Growth is now confined to the firm’s travel division, which operates shops at airports, railway stations and motorway services. Sales at travel outlets rose by 7% during the first half of the year, while trading profit was 5% higher at £41m.
This is a contrast to the group’s high street division, which remains profitable but is in decline. High street sales fell by 5% during the first half and trading profit was 6% lower, at £50m. Many of Smith’s high street stores are suffering visibly from lack of investment. It seems clear that at some point, major changes will be necessary on this side of the business.
My verdict
My colleague Rupert Hargreaves takes a grim view of this situation, but my belief is that the group’s management will find a solution. In June’s third-quarter trading update, management said that trials are under way to test new and smaller store formats on the high street. I believe that a joint venture or trade sale might also be possible at some point.
WH Smith’s share price looks up with events to me, on 20 times forecast earnings. But the 2.6% dividend yield is backed by free cash flow and should continue to grow. I’d hold the stock at current levels and consider buying during the next market wobble.
