At first glance, shares in spread-betting and contracts-for-difference (CFD) provider Plus500 (LSE: PLUS) appear dirt cheap. Indeed, after sliding by more than 75% in around six months, at the time of writing shares in the business are dealing at a forward P/E of approximately 4.1 and support a dividend yield of 18.7%.
However, while the stock might look cheap after recent declines, I think Plus deserves this low valuation. Here, I’m going to explain why.
Following regulators’ decision to crack down on speculative derivatives such as CFDs and binary options, profits at firms that offer these products have collapsed. And Plus is no exception. Today, the firm announced a 65% quarter-on-quarter decline in revenues for the first quarter of 2019. Year-on-year, revenues crashed 82%. Meanwhile, the overall active number of traders declined 4% to 97,921, something management attributes to “low levels of volatility.“
A subdued market environment might be responsible for some of Plus’s problems, but its clear these new regulations are having an impact. The average revenue per user in the quarter declined 64% to $550, which is now significantly below the average user acquisition cost of $1,230.
These numbers make it very clear that the company is suffering significantly from the new regulations bought in last year and I think it’s going to be difficult for the group to achieve City growth forecasts for 2019. Analysts are currently expecting a 48% decline in earnings per share to $1.73 for the full year, although with revenues down 82% in the first quarter, this estimate now looks conservative.
With this being the case, I would stay away from shares in the financial services company for the time being, even though they may look cheap because, right now, there’s just too much uncertainty surrounding the outlook for the business.
And the same can be said for its dividend. With earnings collapsing, I think it will only be a matter of time before management has to readjust the distribution lower. All in all, the numbers above tell me Plus’s 19% dividend yield is not safe.
A better buy
Before you go, if you’re looking for cheap income stocks, I think you should check out CMC Markets (LSE: CMCX). CMC operates a somewhat similar business to Plus, but the company targets wealthier individuals and has been expanding its offering, diversifying away from risky financial derivatives by building out its stockbroking business.
These efforts haven’t been enough to offset the decline in profits from the regulatory clampdown completely, but management’s expansion plans give me confidence that this company will be able to navigate through this rough patch successfully and pull out the other side.
Analysts have the stock trading at a 2020 P/E of 9.6 and yielding 6.4% for the same year. These metrics don’t look particularly cheap compared to Plus but, as I have mentioned above, I think the former’s outlook could deteriorate rapidly over the next 12 months, while CMC’s dire outlook might improve as the group continues to bulk up its stockbroking arm.
Still, if you’re not interested in this company, here at the Motley Fool we believe there are plenty more opportunities out there on the market right now.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.