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Should I buy this cheap FTSE 250 share?

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Plus500 (LSE: PLUS) shares rose about 35% in the past year. This was mainly due to the increase in trading on the company’s platform during the Covid-19 pandemic.

While I was screening stocks for a good investment, this company caught my attention due to its low price-to-earnings (P/E) ratio. I would like to carefully analyse this FTSE 250 stock.

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The bull case 

Plus500 has a leading technology platform for trading contract-for-differences (CFDs). It has gained popularity as it offers customers the ability to trade over 2,500 different underlying instruments. Its free demo account helps traders to understand how the platform works. It also launched traditional share trading services last year.

It accepts clients from over 50 countries. This has helped the company to have a geographically diversified revenue base. The company gets about 12% of its revenues from the UK and the rest is derived internationally. It also plans to expand internationally in its existing and new markets.

The company today announced the acquisition of Cunningham Commodities. It operates a trading platform in the futures and options market in the US. This will provide Plus500 with a footprint in the fast-growing US market. It bought the company for $30m. I believe it is a good deal as Cunningham Commodities had revenues of around $19m in 2020 and a pre-tax profit of $0.6m. So it valued the company at about 1.5 times 2020 revenues.

Plus500 revenue growth has been strong. For the year 2020, revenues grew by 146% year-on-year to $873m. Revenue grew at a compounded annual growth rate of 28% in the past five years. It also maintained a good net profit margin in the range of 35% to 55% during this period. Looking into the valuation, the stock is trading at a price-to-earnings ratio of 4.5. The low P/E ratio is another reason why I like this FTSE 250 stock.

The company plans to distribute around 50% of its profits as dividends. It has a good dividend yield of 7%. However, there is no guarantee that the company will continue to pay future dividends. 

Risks to consider in this FTSE 250 stock

The lockdown forced millions of people inside their homes. People had more free time, which many used to learn and trade stocks. However, with the lockdown easing the trading volume might come down. This can also be seen in the company’s results. Its revenues in the first quarter of 2021 dropped 36% year-on-year to $203.2m.

CFDs are risky instruments. The company’s profits might be negatively impacted by its clients’ trading losses. The company in the past has suffered trading losses. 

Trading firms have to comply with various regulations. The rules might change, which could create additional costs to the company. There could also be a ban on product offerings in a particular country. So these could increase the volatility in the stock.

Final view

The company is fundamentally strong with low valuation. The good dividends are icing on the cake. I will consider buying this FTSE 250 stock in the coming months. 

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Royston Roche has no position in any of the shares 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.

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