London Stock Exchange Group (LSE: LSEG) is a stock I’ve been watching for a while now. This is a blue-chip FTSE 100 company with a number of competitive advantages.
Last week, I decided it was time to pull the trigger and actually buy the stock for my ISA so I purchased 20 shares to get the ball rolling. Here’s a look at why I invested in the company.
A leading FinTech business
London Stock Exchange Group is a diversified financial markets infrastructure and data business that operates through three divisions: Data & Analytics, Capital Markets, and Post Trade.
It’s the Data & Analytics side of the business that interests me the most. This segment includes the company’s FTSE Russell business, which owns the FTSE and Russell indices. Owning these, which includes the FTSE All-Share, Russell 2000 etc, is basically a licence to print money, in my opinion.
It also includes Refinitiv, which is a financial data platform that offers best-in-class information and insights. This platform, which is used by institutional investors in nearly 200 countries worldwide, generates over $6bn in revenue every year.
I think this part of the business should help the company generate solid growth in the years ahead.
Microsoft partnership
But this division isn’t the only reason I’m bullish here. Another thing I like about London Stock Exchange Group is that it recently formed a partnership with tech giant Microsoft. This will see the two businesses work together to develop next-generation artificial intelligence (AI) and cloud-based data and analytics services.
In a statement, the company said the deal is expected to increase its revenue growth “meaningfully” over time as new products come on-stream.
Overall, I see plenty of growth potential.
Potential for solid gains
Now I reckon this stock has the potential to deliver solid capital gains in the years ahead.
At its current share price, the forward-looking price-to-earnings (P/E) ratio here (using next year’s earnings forecast) is about 21. I think that’s too low. Currently, US rival S&P Global trades on a multiple of 28.
So I see scope for P/E ratio expansion in the years ahead. Personally, I think the multiple could easily rise to 25.
Add in 5-10% earnings growth a year (for 2023 the group expects 6-8% constant currency growth in total income), and I think a share price of £100 is very achievable in the not-too-distant future.
It’s worth noting that share buybacks should support earnings growth. Recently, the company announced a £750m buyback.
I plan to buy more shares
Now, one risk to my thesis is the fact that an investor consortium including Blackstone and Thomson Reuters (which sold Refinitiv to London Stock Exchange Group in 2021) is selling stock to reduce the size of its stake. This could keep share price gains muted in the near term.
I’m comfortable with this risk however. I plan to buy another 20 shares in the next few months and another 20 towards the end of the year as I build up my position to near the £5k mark.
So a lower share price would actually work in my favour.
