The London Stock Exchange Group (LSE: LSEG) share price is up 39% in the past five years, well ahead of the FTSE 100 whose stocks it manages.
Might it be a good way to buy the market, rather than going for an index tracker?
On Thursday (24 October), the company reported an 8.7% rise in Q3 revenue year on year. In addition to, well, being the London Stock Exchange, the firm also gets a chunk of revenue from its data services.
In fact, Data & Analytics accounted for 47% of income in the quarter at £992m, eclipsing even the firm’s Capital Markets income of £468m.
Partnership
CEO David Schwimmer spoke of “delivering multiple new products in Q3.” He added that “Our partnership with Microsoft continues to make strong progress and our product timetable is on track.“
At H1 time, the boss told us that the first Microsoft-based product was due to be “more widely available by year-end.” So that should be something to keep an eye on in 2025.
One thing I really like about this company is that it has a big safety moat. And it has good earnings visibility.
There’s competition in the stock market analytics business. But London Stock Exchange has an advantage being so close to the business end.
No matter where individual share prices might go in the coming decades, demand for those services must surely remain strong. The financial services industry still needs its data just as much in a bear market as a bull one.
Valuation
Where I’m wary though, is when it comes to valuation. Earnings per share (EPS) is a tricky figure to get a grip on.
At the halfway stage, the company posted basic EPS of 64.7p per share. Doubled up, that would suggest a huge price-to-earnings (P/E) ratio of 82 for the full year.
But we also saw adjusted EPS of 174p for the half. And using that as a basis puts the P/E at 31. I’d need to dig fairly deeply into the accounting adjustments here before considering a buy.
Also, looking at the past five years, the London Stock Exchange share price has been surprisingly volatile. I’d have expected the company’s strong long-term position to help keep it steady.
But no, sentiment seems to be every bit as variable as with most other stocks.
Solid outlook
The financial data services market is forecast to grow at around 10% per year between now and 2030. And that should hopefully mean some nice profit growth.
The customers include wealth managers, hedge funds, and all manner of City institutions. They’re surely going to base their subscription decisions on their objective financial needs. And not on the emotion that can drive individuals in the short term.
So what’s my take on London Stock Exchange Group as an investment? Part of me sees it as possibly one of the UK’s safest and most dependable companies.
But another part of me is wary of the high, and uncertain, valuation. And the modest 1.2% forward dividend yield doesn’t thrill me.
