Moneysupermarket.com (LSE: MONY) reported earnings for FY2020 on 18th February. As most expected, the year was tough for the online price comparison company. Revenues during the period fell 11%, driven primarily by a particularly dramatic decline in the company’s travel and money segments, the latter of which fell 27%. Operating profit also fell by 26% over the period, reflecting the negative pressure on margins and free cash flow declined by over 30%. Despite this news, Moneysupermarket’s stock price jumped 7% after earnings were released.
This was largely due to the management’s optimistic tone regarding the future. During the presentation, CEO Peter Duffy expressed his confidence in the fundamental outlook for the industry, saying that one should expect growth to return to “around mid-single digit” growth after the Covid-19 pandemic. Scilla Grimble, CFO, also stated that the recovery of the company’s financials were dependent on the pace of lockdown measures easing. With the vaccine programme progressing at a fast pace and the government setting a plan for the final lifting of restrictions, this also gave reason for investors to be optimistic.
Management also did much to reduce investors’ fears over the impact of new regulations due to come in at some point this year, banning the practice of price walking. Essentially, this would force insurance providers to charge the same price to new and existing customers. As price walking has historically been a key reason why customers have come to price comparison sites, such a move is likely to negatively impact the demand for Moneysupermarket’s insurance comparison services. However, during the earnings presentation, Peter Duffy made the point that price walking is only one reason why customers come to these sites and that the new regulations in the auto insurance industry – allowing customers to manually switch providers – should offset at least some of this reduction in demand.
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Is Moneysupermarket stock a buy?
Although there are reasons to be optimistic about the future, this isn’t enough to determine whether or not Moneysupermarket stock is a buy. I also need to look at the long-term fundamentals and the company’s valuation.
Looking at the fundamentals, it is clear to me that Moneysupermarket is a high quality business. The company has a long history of consistent growth, with this year being the first since 2009 where revenues have not grown year-on-year. Margins are also high, with operating profit and net profit margins averaging 29% and 23% respectively over the last five years. The company is very efficient as demonstrated by its high return on capital employed (48% over the last five years) and it has a dominant position in its industry. Moneysupermarket is also making encouraging investments in technology and customer personalisation, as well as moving into the relatively new market mortgage comparisons. These moves should help the company to grow well into the future.
At the time of writing, shares in Moneysupermarket are trading at around 291p, representing a trailing twelve month price-to-earnings (P/E) ratio 22.6. This is very similar to the FTSE 250, which was trading at the same P/E ratio as of 1st January 2020. Given the information above, I think the company is a higher quality business and has better growth prospects than the average company in the FTSE 250, making Moneysupermarket stock a buy for my portfolio.
