The FTSE 100 index was subdued yesterday. It closed below 7,300. But this particular stock is up by more than 10%, making it the biggest index gainer so far as it continues to rise in early trading today. Often when individual stocks start flying in contradiction to the broader markets, something quite newsworthy is going on with them — robust financial results, for instance.
What happened to the LSE’s share price?
This is exactly what happened for the London Stock Exchange Group (LSE: LSEG), which rallied yesterday. But first, some context. The FTSE 100 stock has had a pretty bad past year. Its price is down by some 25%, even after the latest bump-up. After making gains during the pandemic, when investing activity was heightened, the stock came crashing down following its acquisition of the data and analytics provider Refinitiv. The ambitious buyout probably made investors nervous.
Robust results for 2021
Its full-year 2021 results, however, seem to have led to a boost of confidence in the stock. Its revenue increased by 6% from the year before and pre-tax profits almost doubled. It also increased its dividend for the year. The group, with a 1.4% dividend yield, does not really qualify as a notable income stock on the face of it. But over the years, its dividends can mount up, even though that does not appear to be the case at first glance. It is also confident about its future performance. Its CEO, David Schwimmer said that the company has “good momentum for 2022”, which sounds encouraging.
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Valuation red flag for the FTSE 100 stock
However, there are undeniable red flags for the FTSE 100 stock too. First, its price-to-earnings (P/E) ratio is at a super-high 70 times. Frankly, this is unheard of even among some really high-performing companies that I have covered in the recent past. And I find it particularly bizarre right now, when its debt is still somewhat high, in my view.
To be fair, it has managed to reduce it to sub-two times as a proportion of earnings before interest, taxes, depreciation and amortisation (EBITDA). But it can still be seen as being at an uncomfortable level considering that much of it happened after the Refinitiv acquisition last year.
What I’d do
Both its valuation and its debt levels are enough to diminish confidence in the stock. If its earnings had risen enough to moderate its P/E, that would have been preferable. There is a an interesting point to be made here though. The company’s adjusted numbers paint a different picture. Earnings are much higher on this measure, which considerably reduces the P/E to around 25 times. And they also reduces the debt ratio. So which earnings figure should I consider? I have tried to dig deep, but it requires more work, since this is the first set of numbers post-Refinitiv acquisition.
With this in mind, I am taking a step back from my earlier belief in the stock. While I have little doubt that it can still be a rewarding stock to hold in the long-term. I think for now, there could be a better opportunity for me to buy it if the share price dips further and its valuations are more aligned to the FTSE 100.
