While the FTSE 100 is currently near all-time highs, not all stocks in the index are participating in the rally. Right now, one of my favourite Footsie stocks, London Stock Exchange Group (LSE: LSEG) or ‘LSEG’, is 24% off its highs.
Given the share price weakness, I snapped up some more shares in this world-class company last week. Here’s why I think the stock is worth considering right now.
Understanding the share price weakness
Last year, shares in London Stock Exchange Group – which is now one of the world’s leading providers of financial data – had a great run, rising about 21%. A lot of investors were excited about the software company’s potential, especially now that it’s working with Microsoft to develop AI solutions for banks and asset managers.
This year, however, the stock has seen some profit-taking. There are a few reasons why.
One is that the AI solutions promised haven’t fully materialised yet. Another is that there’s concern AI is going to lead to automation within the financial industry, resulting in less staff at firms, and therefore fewer users London Stock Exchange can charge companies for.
Now, the first issue I’m not too concerned about. This is just a timing issue. These AI solutions are still coming. The company just wants to make sure that they’re accurate before they’re launched (other AI companies could take note here).
The second issue is more of a genuine risk. And it’s something to think about. Yet my take here is that banks and asset managers are generally very slow to automate operations. So, it’s not like LSEG’s revenues are suddenly going to fall off a cliff.
Meanwhile, I think this issue is probably now priced into the stock. Looking at the earnings forecast for next year, the forward-looking price-to-earnings (P/E) ratio is only 21. That’s a really low earnings multiple for a financial data company with recurring revenues. I’d expect the P/E ratio to be closer to 30.
Solid H1 results
It’s worth pointing out that LSEG’s recent H1 results were solid. For the period, total income was up 6.4% year on year. Meanwhile, adjusted earnings per share were up 20.1%.
On the back of these results, the company hiked its dividend by 15% (signalling confidence from management). It also announced a £1bn share buyback.
“We have built a business which is strategically aligned to a number of powerful growth drivers: the long-term growth in demand for data to feed and drive the modern economy, including for AI models, the digitisation of financial markets and the increasing demands of regulatory, financial and reputational risk management.”
LSEG CEO David Schwimmer
I’ll also point out that after the results, several insiders – including the CEO – bought company shares. This signals that those within the company expect the share price to rise in the future.
My largest UK holding
Put all this together, and the risk-reward set-up here is attractive, in my view. I’ve made the stock my largest UK holding, and I believe it’s worth a look today.
