Shares in FTSE 250 insurer Esure Group (LSE: ESUR) rose this morning, after the company said it might spin off its Gocompare.com price comparison business.
Esure’s May trading update showed that Gocompare.com’s revenue rose by 19% to £36.3m during the first quarter of the year. The group said today that it’s confident the website’s profitability can be improved by 20% or 30% in 2016. Given that Gocompare.com generated a pre-tax profit of £23.3m on £119m of sales last year, these comments suggest that the 2016 figures could be quite impressive.
A decision to separate Gocompare.com would also have a material impact on Esure’s profits, as Gocompare.com generated 28% of Esure’s underlying pre-tax profit last year. However, a spin-off into a newly-floated company could work well — Gocompare.com’s shares would be likely to trade at a higher valuation than those of Esure.
Interestingly, Esure also announced it had hired a new chief executive for Gocompare.com today. Matthew Crummack has previously worked at Lastminute.com and Expedia, so has a lot of relevant experience. I suspect he will have big ambitions for the business.
Current thinking suggests Esure’s forecast yield of 4.6% should be well covered by earnings this year. Significant growth is expected in 2017. In my view it’s not too late to invest in Esure.
Have bakery profits peaked?
Shares in high street baker Greggs (LSE: GRG) fell by 15% in two days in January after the company said sales growth had slowed at the end of last year. The shares have recovered somewhat since then, but are still down by 15% so far this year.
This could prove to be a buying opportunity. Earnings forecasts for the current year have risen modestly since January. Greggs’ shares now trade on a forecast P/E of 19, falling to 18 for next year.
The group’s balance sheet remains strong, with net cash of £42.9m at the end of last year. This year’s forecast dividend of 29.5p should be covered twice by earnings, and equates to a reasonable 2.6% forecast yield.
Greggs’ proven performance means the shares aren’t cheap. But growth is expected to improve next year, and the firm has a history of beating expectations.
How risky is this oil stock?
Technical problems at the offshore Ghana Jubilee field have given managers at Tullow Oil (LSE: TLW) a headache this year.
However, these should soon be resolved and the firm has insurance in place to limit the financial impact. In my view, a more serious concern is that earnings forecasts for this year have fallen heavily since Tullow published its annual results in February.
At the start of this year, Tullow was expected to report earnings of $0.17 per share. Despite the recovering oil price, that figure has now fallen to just $0.037 per share. A recovery in earnings has been pushed back to 2017.
I’m concerned that Tullow’s $4.5bn net debt may limit the firm’s recovery. Tullow intends to refinance the majority of its debt in 2017, as repayments start to become due. Repaying this debt will put a lot of pressure on the firm’s cash flow.
Although new production from the TEN project is expected to boost sales and profits next year, I think this is already reflected in Tullow’s share price.
