2015 has been a superb year for investors in lending specialist S&U (LSE: SUS), with the company posting a rise of 22% in its share price. Part of the reason for this is an improving macroeconomic outlook and continued low interest rates, which are combining to give consumers increased confidence to borrow and spend.
Of course, many investors may be somewhat concerned about the medium term outlook for lenders such as S&U. That’s because, with interest rates set to rise, demand for loans may come under pressure and could see the company’s top and bottom lines weaken somewhat. However, today’s trading update from S&U shows that the business is performing well and is able to look ahead to further strong performance moving forward.
For example, S&U has reported that gross receivables in its motor finance division, Advantage Finance, have increased to £200m for the first time in the company’s history. And, while total transaction volumes for the half year to the end of July have fallen, recent strength means that they should reach a record level for the full year.
Meanwhile, S&U’s home credit business reported a fall in sales of 9% in the first half of the year. And, while its profitability is flat versus the same period of last year, the decision to sell the business for £83m appears to be a sound one, since growth prospects for the division appear to be somewhat limited. Furthermore, the sale should provide S&U with increased scope to become a more specialist and niche lender, which could have a positive impact on the company’s profit margins.
Looking ahead, S&U is expected to post strong growth numbers next year, with its bottom line forecast to rise by as much as 18%. The company’s valuation, though, does not appear to reflect this impressive growth rate, with S&U trading on a price to earnings growth (PEG) ratio of just 0.8, which indicates further share price gains are on the cards.
Clearly, S&U is heavily reliant on the performance of the UK economy and, while it appears to be worth buying at the present time, a company with far less correlation to the wider economic outlook could outperform it. In fact, pharmaceutical company GlaxoSmithKline (LSE: GSK) offers a very bright outlook for next year, with its earnings set to rise by around 12%. As with S&U, its share price does not appear to reflect such impressive growth potential, with it trading on a PEG ratio of just 1.4.
In addition, GlaxoSmithKline offers a higher dividend yield than S&U. It yields around 5.7%, while S&U has a current yield of 3.1% and, while interest rates may be set to rise, impressive dividend yields are likely to remain en vogue among investors over the medium term, which could push GlaxoSmithKline’s share price higher.
This, coupled with its hugely impressive pipeline that notably includes potential HIV treatments via is ViiV Healthcare subsidiary, as well as excellent growth, low correlation with the wider economy and a relatively appealing valuation, means that GlaxoSmithKline appears to be a better buy than S&U at the present time. Certainly, GlaxoSmithKline may be going through a transitional period but, for long term investors, this presents an opportunity to buy-in ahead of improved financial performance.
