The FTSE 100 is up 6.5% since the start of the year, which presents a challenge for value investors looking for shares to buy. But I think there are still opportunities.
One that stands out to me is Informa (LSE:INF). I think it looks cheap at the moment, which is why it’s on the list of stocks I’m looking to buy the next time I have cash available.
Appearances are deceptive
Informa’s business involves running trade shows and conferences. It’s easy to underestimate the significance of these events, but they’re extremely important in their respective industries.
Recessions, trade wars, or even pandemics are among the biggest challenges for the firm. These have caused profits to fall in the past (though the firm has tended to recover strongly).
At first sight, Informa doesn’t look like much of an investment opportunity. It trades at a price-to-earnings (P/E) ratio of 36 and achieves returns on equity of 4.5%.
Neither of those looks like an obvious value investment. But I think both are misleading and a closer look reveals a much more attractive proposition.
Returns on equity
Informa has been highly acquisitive over the last 10 years, which means its balance sheet has a lot of goodwill on it. And this distorts the firm’s return on equity.
Goodwill is an accounting concept that is used to mark the difference between the amount a company pays for another business and the net value of its assets. But it’s not like other assets.
Unlike things like equipment or buildings – which have to be maintained – goodwill doesn’t have ongoing costs. As a result, investors might set it aside when calculating returns on equity.
Focusing on Informa’s fixed assets, its net income represents an annual return of more than 100%. And that’s much more like it, from an investment perspective.
Earnings
Informa’s history of buying other businesses also weighs on its net income. Officially, it has some significant amortisation costs associated with intangible assets that it acquired.
These, however, aren’t cash expenses. As a result, the company sets these aside in calculating its adjusted earnings figures, which it believes offer investors a better view of the business.
The difference between these adjusted figures and Informa’s official net income is quite dramatic. For 2024, the firm’s adjusted earnings per share are roughly double its statutory profits.
On this basis, the stock is actually trading at a P/E ratio of around 18, which is roughly in line with the FTSE 100 average. And I think that’s quite an attractive valuation.
I’m buying
Informa isn’t a household name and it doesn’t immediately jump out as an undervalued stock. But a closer look at the company reveals what I think is an attractive investment opportunity.
Ultimately, the firm has some very attractive economic properties, and I think the stock is a lot cheaper than it looks. That’s why I’m looking to buy it in my Stocks and Shares ISA.
