Buy underrated Moneysupermarket.com

The problem is that there are too many of them. So many, in fact, that websites now exist to compare price-comparison sites. This means market leaders are having to spend big money on advertising campaigns to ensure they stand out from their peers. Across the sector, spending on Google-ads has damaged margins, while increased mobile usage is making it harder to retain customers.

In the past 18 months, Moneysupermarket.com (MONY) has been buffeted by these challenges and then some. In 2017, a decline in the volume of collective energy switching (a big trend of the previous year) hampered revenues in the ‘home’ division, while insurance growth slowed. The company’s boss and founder jumped ship before the bad news started flowing and new chief executive Mark Lewis spent the first few months of his tenure, which began just over a year ago, slicing expectations for the coming year.

And so – you may well ask – why are we suggesting readers may want to buy the shares?

For a start, we don't feel the market is as challenging as Moneysupermarket’s share price suggests. People are using price comparison websites for an increasing number of products, which provides an excellent opportunity for well-diversified companies. Brits are also growing more conscious of the need to switch energy, insurance and telecoms suppliers regularly and price comparison websites are becoming better at offering the very best deals. The core market is expected to grow at between 6 and 7 per cent annually, and even with the company guiding to a temporary period of below-market growth this year, Peel Hunt’s forecast of 5 per cent compound annual growth in sales over the next three years looks conservative to us.

Share price weakness over the last year means that, even based on these potentially stingy forecasts, Moneysupermarket’s shares trade on just 18 times 2018 forecast earnings, falling to 16 times in the year after that, on a cash-adjusted basis. The shares of peers such as GoCompare (GOCO) and Zoopla (ZPG), have not been nearly as badly hit, making shares in Moneysupermarket look something of a bargain.

What’s more, Moneysupermarket offers investors far more quality than many of its newer rivals. It is a well-diversified business, with home, insurance, travel and money subsidiaries, which help to shore up revenue growth when pockets of market weakness emerge. This was shown in the first quarter of the current year when sales rose 4 per cent despite the money division reported a disappointing decline in revenues, offset by double-digit growth in energy and resilience in insurance.

Moneysupermarket also generates a lot of cash, routinely reporting operating cash conversion of over 100 per cent. The resultant strong balance sheet supports the group's generous dividend (and occasional specials), with the shares forecast to yield 3.8 per cent this year, rising to 4.2 per cent in 2019.

New boss Mr Lewis has experience running digital companies, having previously been online director at John Lewis and having spent time at Collect+ and eBay. That should come in handy as management plans to reinvigorate the group’s IT systems in a bid to attract new customers. Personalisation of the platform should encourage repeat custom, while investment in the mobile service is helping boost conversion (when customers actually make a purchase through the site, rather than just browsing). That investment will add £5m of costs in 2018, with a further £6m to £9m from business reorganisation, which is expected to dampen profits in 2018. But operating margins (and therefore profits) are forecast to rise in 2019 and beyond.

Meanwhile, revenues could be boosted beyond current forecasts by efforts to move into new markets. Management has pledged to expand its limited mortgage comparison offering, which makes sense given its site already attracts 25 per cent of online mortgage search traffic. More important is the recent £40m acquisition of Decision Technologies, which will expand the group’s reach in consumer comparison brands via websites such as broadbandchoices.co.uk and comparemymobile.co.uk. The company – which Moneysupermarket will buy for £40m should it gain regulatory clearance – also has a white-label business-to-business operation that provides the technology behind many of the UK’s leading comparison tools and is used by the likes of GoCompare and Comparethemarket.com. Decision Technologies has the potential to add £3m in profits over the remaining three quarters of 2018, which Peel Hunt reckons would spark a 2.5 per cent uplift to its EPS forecasts.