Trading, investment and information solutions company Fidessa (LSE: FDSA) today announced its results for 2016, reporting a 12% rise in revenue and a 25% increase in pre-tax profit.
Could this FTSE 250 firm, which services 85% of the world’s premier financial institutions (from investment banks to niche hedge funds), be a better investment than one of its prominent FTSE 100 banking clients?
Solid results
Fidessa’s revenue, earnings and dividend were comfortably ahead of City expectations but the shares are only modestly higher in early trading. The headline numbers received a huge boost from weakened sterling since the Brexit vote. For example, while it reported pre-tax profit up 25%, the rise at constant exchange rates was just 1%.
Nevertheless, these were solid results. Fidessa ended the year with £95m cash on the balance sheet (up from £78m the previous year) and no debt. The board lifted the final dividend and regular special dividend by 11%.
Financial regulation continues to be a long-term driver for Fidessa’s growth as customers focus on efficiency, transparency, compliance and performance. In the shorter term, the company noted that customers have been faced with uncertainty around how the Brexit vote and the US election results might affect their business.
A premium worth paying
Fidessa’s shares recovered quickly from the financial crisis and from their 2009 year-end price have more than doubled to a current 2,450p, giving a market cap of £945m. However, only about a third of this increase reflects earnings growth, with the majority coming from the market simply valuing the company’s earnings more highly. The price-to-earnings (P/E) has therefore risen from 16.8 to 26.2.
Today’s P/E is obviously relatively high but Fidessa’s strong balance sheet, international diversification, 87% recurring revenue and a 3.8% dividend yield merit a premium rating, in my view. The stock may have been cheaper in the past but I continue to see this as a good long-term investment today.
A £7.5m vote of confidence
Shares of Barclays (LSE: BARC) had recovered from the financial crisis to over 350p by late 2009. However, in contrast to Fidessa’s, they’ve made no progress since. In fact, Barclays’ shares have been below 300p for the best part of the last four years.
Legacy issues have continued to dog the company but I still think there’s a good underlying business here and long-term value to be delivered for investors. Chief executive Jes Staley, who took the helm in December 2015, is obviously of the same mind, because he bought £6.5m of shares at 233p before even getting his foot through the boardroom door. When the shares fell to 170p, he splashed out another £1m.
Re-rating potential
At the time of Mr Staley’s first buy, Barclays was trading at a near-20% discount to net tangible asset value, a level from which I thought investors could reap substantial long-term rewards. At the time of his second buy, the discount was 40%, which I thought was terrific value.
Today, the shares are at 230p, back to a near-20% discount to net tangible asset value, so I still see substantial long-term rewards for investors from here. Barclays’ P/E for the current year is a modest 11.8, falling to 10 for 2018, as strong earnings growth is expected to kick in.
As such, while I think Fidessa is a solid investment, I believe Barclays could be set for the kind of re-rating in the coming years that Fidessa has enjoyed in the past.