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Here’s why I still like the Moneysupermarket share price

Back in February, I wrote an article about (LSE: MONY) concluding that its shares were a buy for my portfolio. Yesterday, the company released a trading update for the first quarter of 2021. Investors reacted negatively to the news with the Moneysupermarket share price closing down 3.5%. What caused investors to react this way and has my opinion of the stock changed as a result?

The trading update

The update revealed that conditions in the online price comparison industry remained very difficult during the quarter. Revenue fell 20% year-on-year with all business segments reporting a decline in sales. Unsurprisingly, the worst-performing business area was the company’s travel-related products. These continued to produce “negligible” revenue. Insurance as a whole was also down 21% and the company’s Money segment declined 26%. This was despite it seeing small improvements towards the end of the quarter.

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On a more positive note, Decision Tech, the recently acquired subsidiary, continued to grow by double-digits. However, this news was marred by the announcement that a significant partner had terminated its relationship with the company. Considering this partner contributes roughly £15m in annual revenue, this will likely have a large impact on the future financial performance of the subsidiary.

The outlook for Moneysupermarket was unchanged with the company expecting 2021 performance to be in line with market expectations. These expectations are for revenue to grow by 2% and earnings per share to grow by 4%. Compared to the wider economy, these figures are unimpressive and probably the main reason why the Moneysupermarket share price fell yesterday.

Has my opinion changed?

But have I changed my mind about the stock? In short, no. I feel Moneysupermarket still displays all the characteristics of a high-quality business. These characteristics include very high returns on capital employed, high margins, a strong market position and strong free cash flow generation. The company also has a long history of steady growth, as well as a large dividend yield at 4.4%.

While the effects of the pandemic have led to a decline in short-term financial performance, I think the company will recover strongly as the global economy bounces back. Travel-related products should return to growth as people start to travel again. The Money segment should also perform similarly as lending conditions begin to relax once more. Moneysupermarket could even enjoy a period of prolonged growth if we enter a post-pandemic ‘Roaring 20s’ scenario as some are predicting.

At current levels, the Moneysupermarket share price does not take into account any of the potential upside, I feel. At the time of writing, the shares are trading at a one-year forward price-to-earnings (P/E) ratio of 19.5 and a two-year forward P/E ratio of 16.2. This is similar to the FTSE 250 and far below the IT sector as a whole. In my opinion, a company of this quality should trade at a much higher valuation. As a result, I’m sticking to my opinion that Moneysupermarket shares are a buy for my portfolio.

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Ollie Henry owns shares in The Motley Fool UK has recommended 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.

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