Stockwatch: Time to ditch this growth favourite?

Is it time to ditch this winning FTSE 250 stock? Interims from price comparison website Moneysupermarket.com declare a mixed message: revenue on the Insurance side up 18% amid busy switching, yet "the lack of blockbuster energy deals" hit Home Services by 33%.

So, is the growth of price comparison services maturing? Margins also appear pressured whereas, until just recently, the long-term record (see table) has shown operating margin growth from an already strong 18.2% to 29.5%.

Quite whether that justifies a price/earnings (PE) multiple of 25 times versus underlying earnings growth of 17.7% for 2016, slowing in 2017: interim adjusted earnings per share (EPS) is up 3.8% (helped also by buybacks) while the prospective dividend yield is a modest 2.7%.

It's time, therefore, to give Moneysupermarket a kick of the tyres. I'm alerted since drawing attention to the stock variously since October 2013, then 145p and yielding 5%. If growth appeal flags at a current price of 340p then the yield won't be enough to attract income buyers - hence liability for a drop.

Is the excuse on energy deals genuinely valid?

The Home Services side "was significantly impacted by reduced energy collective switch activity", with revenue down 16% to £25.1 million.

A lack of blockbuster deals may indeed have had influence, although my own experience is that once you've assessed what different providers offer, according to your electricity/gas consumption, it's a hassle to keep comparing the whole market. Also because switching involves an off-chance of billing snags.

I keep an occasional eye on price-plan offers from EDF Energy and switch between these occasionally. I do not have a smart meter and people are letting utilities install them unaware it can complicate switching if the meter remains the property of the utility - or a replacement is needed to be compatible with any new provider.

A third reason why energy switching activity may have peaked is the price cap on standard tariffs the Conservatives have proposed, which utilities say will compromise their ability to offer regular deals.

Mixed profile of revenue growth

The more significant Insurance side advanced 18% to £88.6 million, benefiting from marketing/pricing initiatives (if potentially at some margin loss) and a strong market for motor switching.

The Money side was flat at £41.8 million, apparently due to an exceptional comparator period of busy current account switching amid offers from banks and building societies. Credit cards and loans grew well, but how long can the UK credit boom last?

Travel improved by 10% to £12.2 million, if modest in context, after website issues were resolved.

Altogether, net group revenue growth was 5% to £165.3 million, or 9% for the three months to end-June. Admittedly this is just a snapshot period, yet the mixed picture appears to reflect price comparison activities maturing.

The group doesn't clarify divisional profits but they boil down to 3.8% EPS growth (benefiting from buybacks) and a 3% rise in the interim dividend, thus intrinsic growth lags a forward PE multiple of maybe over 20 times.

Slight profits downgrading for 2017

After cautioning that energy switching is unlikely to recover in the second half, adjusted operating profit has been guided to the lower end of a £112.6 million to £117.4 million range, hence forecasts being revised with no consensus currently available.

One analyst has already opted for £113 million, representing 5% growth this year, and notes that, while the consensus on earnings may slip 1% to 3%, "guidance may be conservative if larger scale collective switches occur in the second half."

In response, the stock has stabilised around 340p, which, in a chart context, remains in long-term uptrend. I'm still wary. Moneysupermarket's story is turning mixed and its progress doesn't warrant a growth rating.

High margins are coming under pressure

Interim gross profit was flat at £120.4 million, with higher online marketing spending easing this margin from 76% to 73%. "Paid search marketing now generates 25% of our revenue, up 5% on last year, and partly arises from customers increasingly using mobile devices." While this provides a growth angle, effectively, the cost of acquiring new customers is going up.

More positively, distribution costs fell 18% to £17.4 million with lower spending on TV ads, although administrative expenses (excluding amortisation) rose 6% to £48.3 million. Technology spending of £9.5 million provides a new and scalable platform, aimed especially at smartphones, becoming available in the second half.

To some extent this represents "investment" being able to increase customers, but, now smartphones are a chief means of sales & marketing, it's possible to see this as a vital "cost" to protect market share also.

Time will tell. With negligible finance costs, normalised pre-tax profit has advanced 4.1% to £48.2 million, shorn of small profits from disposals.

Not pushing one's luck with capital growth

As mentioned, I've drawn attention repeatedly to Moneysupermarket since it traded at 145p yielding 5% in October 2013. In early 2016 the stock reached a 377p peak, fell to 234p late last year and I drew attention to recovery last January, which has happened by way of a rebound to 360p.

In response to the update the stock has shed about 20p to 340p, not as if the market is perturbed. My concern is it becoming exposed as neither a firm growth nor income play, especially if earnings flatten.

It has good potential for income due to a strong cash flow profile versus generally low capital expenditure and no debt. But it's largely about price: the stock presently yields close to 3%, albeit with earnings cover of about 1.5 times, so the board hasn't scope to re-rate the payout. Also, an interim dividend of 2.84p was slightly shy of expectations.

So, if the trading story was to worsen the stock is exposed to fall towards a level that could tempt income buyers - a 4% yield implies about 250p. That's not a prediction; just a scenario to illustrate risk. Intangibles represent 104% of net assets so the yield would be in focus for downside protection.

The bull case for price comparison services is that consumers squeezed by inflation and relatively static wages, i.e. the industry context, should be supportive.

There's still a risk sense gathers, the best days are over here and the industry is more competitive, which tips the market into exacting a more meaningful yield. Capital protection being the first objective when investing, the conclusion is "sell" Moneysupermarket and await a status change to income share.