Despite a reputation for trading at a discount to their US counterparts, some UK shares trade at very high price-to-earnings (P/E) multiples. But these can often be better value than they look.
There are a couple of stocks from the FTSE 100 and the FTSE 250 that currently trade at P/E ratios above 30. But – for different reasons – I think both are worth considering.
Informa: a corporate cash machine
Informa‘s (LSE:INF) in the business of running trade shows and conferences. Its biggest competitive strength is the popularity of its events, which are leaders in their various industries.
The firm also leases – rather than owns – the venues that host its events. As a result, it has relatively little in the way of physical assets, which makes for low maintenance costs.
A consequence of this is that Informa’s free cash flow is consistently higher than its net income. In 2024, net income was around £407m, while free cash flow was £771m.
The company’s cash flow statement indicates that a lot of the difference is due to amortisation costs. Some of these relate to the firm’s acquisition of Ascential in 2024.
There are some important risks to consider. One of the most obvious is the possibility of a trade war, which is especially live at the moment and could be significant.
Importantly though, I don’t think the stock’s as expensive as its P/E multiple suggests. On a free cash flow basis, it trades at a multiple of 13 and this seems much more reasonable.
Ibstock: in a cyclical decline
Shares in FTSE 250 brick manufacturer Ibstock (LSE:IBST) currently trade at a P/E ratio of almost 50. But there’s a very clear reason for this.
According to the Office for National Statistics (ONS) the number of housing completions has been falling since 2021. And that has been weighing on demand for bricks.
There’s reason to believe though, that the long-term picture’s much more positive. The UK has a shortage of housing that might well lead to strong demand over the next decade and beyond.
If this causes Ibstock’s earnings to get back to where they were at their peak, the current share price implies a P/E ratio of around 8. I think that means the stock might not be as expensive as it looks.
Ongoing developments in housing construction are a potential risk for the firm. Some new building techniques require fewer bricks than traditional ones and this is worth paying attention to.
Investors therefore shouldn’t be complacent when it comes to the stock. But they also shouldn’t take a high P/E ratio at face value as a sign the company’s shares are overvalued.
Buying at high multiples
Valuing a stock isn’t just about looking at the multiples it trades at. A high P/E ratio says more about investor expectations than the underlying business.
With Informa, the business generates more cash than its net income indicates. And Ibstock’s profits should gather momentum in the event of UK housebuilding picking up in the future.
I don’t think investors would be mad to consider buying either at today’s prices. I see both as reasons to look past the headline multiples when it comes to evaluating stocks.
