Plus500 (LSE: PLUS) has today released interim results for the six months to 30 June. They show that the company is making good progress and provide guidance as to whether it’s now a better buy than financial services sector peers such as Barclays (LSE: BARC) and Prudential (LSE: PRU).
But can surging sales and customer numbers translate into a surging share price?
Plus500 posted sales growth of 25% versus the same period of last year as its new customer numbers grew by 9% to 56,929. But the online provider of contracts for difference (CFDs) was unable to deliver such a strong growth in its profitability. Its earnings before interest, tax, depreciation and amortisation increased by just 6%.
This was due to a higher than expected number of new customers that suppressed EBITDA margins due to the acquisition and on-boarding costs incurred prior to generating revenues from the new customers. Once those costs have been incurred, they’re expected to benefit the company’s bottom line over the medium-to-long term and excluding such costs, Plus500’s EBITDA margins were a healthy 50%-plus.
Its market share increased during the period and partly due to this, it’s expected to record a rise in earnings of 18% in the current year, followed by further growth of 5% next year. This puts it on a price-to-earnings growth (PEG) ratio of 1.8, which indicates that its shares are rather fully valued at the moment. Certainly, Plus500 has excellent long-term growth potential but following a 70% rise in 2016, its shares may struggle to rise by a further 30%.
Upward rerating potential?
However, there’s still excellent value for money on offer elsewhere in the financial services sector. For example, Barclays is expected to increase its bottom line by 55% next year as its turnaround strategy begins to bear fruit. This puts it on a PEG ratio of only 0.2, which indicates that upward rerating prospects are high.
Furthermore, Barclays is now focused on improving the strength of its balance sheet at a faster pace than previously. While this means that dividends have been cut, Barclays should become a stronger and more profitable bank with a lower risk profile in the long run.
Similarly, Prudential has the scope to rise by more than 30%. It has a PEG ratio of 1 due in part to its growth forecast of 11% for next year, and also because its shares have a price-to-earnings (P/E) ratio of only 12. This indicates that there’s major upward rerating potential on offer since Prudential has a strong position within the lucrative Asian market.
Financial services products are expected to enjoy a period of intense growth as incomes rise across Asia and Prudential could therefore enjoy a tailwind over the coming years. As well as a diversified business and a sound strategy, this means that now is a good time to buy it ahead of potential 30%-plus gains.