Today’s first-half results from Tullett Prebon (LSE: TLPR) were slightly disappointing on the face of it. Indeed, underlying earnings per share (EPS) fell from 22p in the first half of 2013 to 16p in the first half of 2014. The key reason for the decline is reduced activity in the financial markets, with Chief Executive Terry Smith admitting that the company cannot predict when the level of activity will increase.
Despite the challenging period, though, Tullett Prebon could prove to be a strong, albeit risky, longer-term play. Could it really be more attractive than industry peers Lloyds (LSE: LLOY) and RBS (LSE: RBS)?
Even though the first half of the year has been tough for Tullett Prebon, it appears to be doing all the right things to navigate through a challenging period. For instance, it is focusing on cost reduction through decreasing headcount and decreasing fixed costs, while it seeks to win new business across the globe.
Indeed, even though the second half of the year is forecast to be equally challenging, the company is expected to post underlying EPS of around 31p for the full year. This would be a fall of 14% from last year, but equates to a price to earnings (P/E) ratio of just 7.9, which is very low compared to the FTSE 100’s P/E of 14.
Of course, Lloyds and RBS also offer good value at current price levels. With both companies set to return to profitability this year, they trade on P/Es of 10.1 (Lloyds) and 14.9 (RBS). Although higher than Tullett Prebon’s P/E, both Lloyds and RBS are expected to grow their bottom lines at a faster rate than their smaller industry peer. Lloyds’ bottom line is due to grow by 9% next year, RBS’s by 15%, while Tullett Prebon is forecast to post growth of 7%.
Clearly, the short term is likely to be uncertain for all three companies. However, it could be more uncertain for Tullett Prebon as increased regulation could harm its business further as banks seek to use its services to a smaller degree going forward. Certainly, the future is also risky for Lloyds and RBS, but they have strengthened their balance sheets and, in RBS’s case, have started to write back up assets that had previously been written down. Therefore, RBS and Lloyds may come with less risk than Tullett Prebon.
A major fillip for shareholders in Lloyds and RBS is set to be increasing dividend payments. They are forecast to grow at a considerable pace over the next couple of years, with both banks targeting high payout ratios. Indeed, Lloyds is aiming to pay out up to 65% of profits by 2016, which would make it a pre-eminent income play.
As of this moment, though, the two banks offer yields of just 1.9% (Lloyds) and 0% (RBS), while Tullett Prebon yields 6.8%. Indeed, Tullett Prebon has the best yield and the lowest valuation of the three and, despite having a highly uncertain future, it could prove to be a great long term investment. Certainly, its earnings profile is likely to remain volatile, but the current price appears to fully price this in, meaning it could deliver an attractive return alongside Lloyds and RBS in the long run.
Peter Stephens owns shares of Lloyds Banking Group and Royal Bank of Scotland Group. The Motley Fool has no position in any of the shares mentioned.