Gocompare.Com Group plc could have 40%+ upside after reporting 30% profit growth

Gocompare.Com Group plc (LON: GOCO) appears to be a buy following today’s update.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Comparison website Gocompare.com (LSE: GOCO) has risen by over 7% today following a strong update. It shows that the company is making excellent progress since its demerger and offers significant upside potential over the medium term. While growth of 40% may sound optimistic, a combination of a rapidly rising bottom line plus a low valuation could make it a highly attractive investment opportunity.

Encouraging performance

Gocompare posted a rise in sales of 19% in the 2016 financial year. This is in line with guidance, although its profitability is at the top end of market expectations. Adjusted operating profit of £30m is 30% higher than the figure achieved in 2015 and shows that the company’s strategy is working well. Cash generation has also been strong, with leverage reducing from 2.8 times at the time of the demerger to less than 2 times at the year-end.

Looking ahead to next year, this impressive level of performance is expected to continue. Earnings are due to grow by 3% in 2017 and then by a further 21% in 2018. This has the potential to improve investor sentiment in the stock, especially since there’s a sound strategy in place to grow profitability over the medium term. And with the management team having been strengthened since the demerger in October 2016, Gocompare is well placed to deliver consistently upbeat results.

Share price growth

If the company’s rating was to remain at its current level, a growing bottom line should send its shares higher by around 25% over the next two years. However, there’s scope for a significantly higher valuation since the price-to-earnings (P/E) ratio is relatively low. For example, Gocompare has a P/E ratio of 13.1. If this rose to 14.7 and the company hit its forecasts in 2017 and 2018, it would trade at over 100p per share. This would equate to a capital gain of around 40% versus the current share price.

A P/E ratio of 13.1 is very achievable on a standalone basis, given the upbeat medium-term outlook for the company. However, it’s even easier to justify when compared to sector peer Moneysupermarket.com (LSE: MONY). It trades on a P/E ratio of 19.2 and yet its forecasts are less impressive than those of Gocompare. For example, Moneysupermarket is expected to post a rise in its bottom line of 8% this year and 9% next year.

Income potential

Furthermore, Gocompare has superior income potential to its sector peer. It yields 2.4%, but this is expected to rise to 2.9% next year. Beyond this, further dividend growth is likely as higher profitability, plus a payout ratio of 30%, indicate that shareholder payouts should soar. This compares favourably to Moneysupermarket, which has a yield of 3.3% but pays out 64% of profit as a dividend. Therefore, its dividend growth prospects aren’t as appealing as those of its sector rival.

As a result of this and its low valuation, high growth rate and sound strategy, Gocompare could appeal to growth, income and value investors alike. It’s among the top risers today and could prove to be a star performer in 2017.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »