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The Expert View: Zoopla, Next and Pearson

Our daily roundup of analyst commentary on shares, also including Auto Trader and IG Group.

by Michelle McGagh on Sep 21, 2016 at 05:00

If you would like to receive news alerts on any of the stocks mentioned in The Expert View, click on the star icons below to add them to your favourites.
Key stats
Market capitalisation£1,399m
No. of shares out418m
No. of shares floating225m
No. of common shareholdersnot stated
No. of employees303
Trading volume (10 day avg.)2m
Turnover£108m
Profit before tax£25m
Earnings per share6.04p
Cashflow per share7.85p
Cash per share4.59p

Zoopla: you ain’t seen nothing yet

Earnings could grow as much as two-thirds at property search engine Zoopla (ZPLAZ) as it continues to fight to be a top stock pick.

Jefferies analyst Anthony Codling retained his ‘buy’ recommendation and increased the target price from 430p to 440p. The shares were broadly flat at 335.1p yesterday.

‘Zoopla was a fighter brand when launched, a fighter brand at initial public offering and, in our view, will remain a fighter brand for the foreseeable future. It may be the old man of property technology but it has lost none of its youthfulness and now complements that enthusiasm with wisdom. If it reaches halfway to our blue sky scenario, earnings could grow by two-thirds,’ he said.

‘Zoopla remains the top pick of all the stocks we cover, the combination of growth and cash generation appeals to us greatly. With customers returning from On The Market, government support for switching services, software products that generate more revenue than they cost to own and untapped, undeserved data markets, we believe that Zoopla will look very different five years from now, leading us to believe you ain’t seen nothing yet.’

Key stats
Market capitalisation£4,009m
No. of shares out989m
No. of shares floating926m
No. of common shareholdersnot stated
No. of employees854
Trading volume (10 day avg.)3m
Turnover£282m
Profit before tax£127m
Earnings per share12.65p
Cashflow per share13.71p
Cash per share1.04p

Auto Trader new initiatives to increase revenues

Car classifieds website Auto Trader (AUTOA) is expected to carry on its strong run as new products boost revenues.

Numis analyst Paul Richards retained his ‘buy’ recommendation and target price of 495p on the shares, which fell 2p to 404.1p yesterday.

‘We note that following on from its recent development of a part exchange tool, Auto Trader is now trialling a Dealer Finance product that enables consumers to see the monthly cost based on a dealer’s panel of lenders and provides a call to action for the consumer to contact the dealer,’ he said.

‘Having benefited from strong growth in stock last year and price increases this year, we expect the monetisation of new products to account for a greater proportion of annual revenue per retailer growth going forward. We retain our “buy” recommendation and 495p target and note that the shares are over -10% below their year high while peers including Rightmove and Zoopla have recovered their post-Brexit losses.’

Key stats
Market capitalisation£3,315m
No. of shares out367m
No. of shares floating362m
No. of common shareholdersnot stated
No. of employees1412
Trading volume (10 day avg.)1m
Turnover£492m
Profit before tax£164m
Earnings per share44.58p
Cashflow per share48.03p
Cash per share89.93p

‘Sell’ risk-conscious IG Group

Spread betting company IG Group (IGG) has prioritised risk management over maximising revenue in the current environment.

Paul McGinnis retained his ‘sell’ recommendation and ‘fair value’ price of 715p on the stock following a first quarter update. The shares fell 2.5% to 903p yesterday.

‘IG has reported trading revenue of £111.4 million for the three months to 31 August, an increase of 5.1% on the same period last year…IG sensibly prioritised risk management over the ability to maximise revenue,’ he said.

‘The main reason for our ‘sell’ recommendation is valuation. With independent estimates of underlying market growth at 7-8%, albeit with some short-term volatility, combined with periodic investment in both the trading platform and digital marketing activities, we think that a 12-month price/earnings multiple of 15x adequately captures IG’s prospects. Therefore, ahead of updating the model, or last published fair value of 715p remains too far below the current price for us to consider moderating our “sell” stance on this well-managed group.’

Key stats
Market capitalisation£7,237m
No. of shares out147m
No. of shares floating139m
No. of common shareholdersnot stated
No. of employees30591
Trading volume (10 day avg.)1m
Turnover£4,177m
Profit before tax£667m
Earnings per share443.06p
Cashflow per share521.26p
Cash per share44.00p

Next: short-term recovery, longer-term problems

Shares in Next (NXT) are expected to rally in the short-term but longer term problems at the retail giant will ultimately take their toll.

Haitong Research analyst Tony Shiret retained his ‘buy’ recommendation and target price of £59.00. The shares fell 2.6% to £49.09 yesterday.

‘We believe that the share price will now turn on short term matters – notably the development of the autumn/winter 2016 season – and should recover in the absence of further weather distortions,’ he said.

‘We continue to believe that longer term prospects are for decline before investors can assess whether Next can develop Directory overseas as a meaningful growth engine. Our already downbeat forecasts, “buy” recommendation based on short-term recovery and fair value of £59.00 are all held.’

Key stats
Market capitalisation£6,499m
No. of shares out822m
No. of shares floating813m
No. of common shareholdersnot stated
No. of employees37265
Trading volume (10 day avg.)4m
Turnover£4,468m
Profit before tax£-352m
Earnings per share-43.28p
Cashflow per share-0.12p
Cash per share212.56p

Pearson ‘structurally at risk’

The profitable educational publishing business at Pearson (PSON) is under threat from new educational resources models.

Liberum analyst Ian Whittaker reiterated his ‘sell’ recommendation and target price of 470p on the shares, which fell 1.4% to 790p yesterday.

‘An article in the Financial Times highlights how Open Education Resources are set to disrupt the higher education textbook market,’ he said.

‘This is our key concern with Pearson that its very profitable US higher education business – estimated 45% of group profits – is structurally at risk. However, we think that Open Education Resources has not yet had a major impact but that it is yet to come; textbook rentals seem to be the main disruptor so far and we think Pearson might be more at risk due to its revenue mix. Reiterate as top “sell”.’

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  • Zoopla Property Group PLC (ZPLAZ.L)
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  • IG Group Holdings PLC (IGG.L)
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  • Next PLC (NXT.L)
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  • Auto Trader Group PLC (AUTOA.L)
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  • Pearson PLC (PSON.L)
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