Markets, technology and risk specialist ICAP(LSE: IAP) has reported an upbeat set of results for the first half of the current year. They show that it continues to perform well despite a high degree of uncertainty in global financial markets. And with its business set to change as a result of the sale of ICAP's global hybrid voice broking business to Tullett Prebon(LSE: TLPR), now could be a good time to invest in both companies.
ICAP's sales growth of 11% was certainly impressive, but it was also exclusively due to currency fluctuations. When sterling's weakness is removed, its top line growth was zero versus the same period of last year. And worse still, its trading profit before tax from continuing operations declined by 7% to £51m. Now this figure is relevant because it represents the part of ICAP that will become NEX Group following the sale of ICAP's global hybrid voice broking business to Tullett Prebon.
So is ICAP/NEX left with a turkey? Although its continuing operations recorded disappointing profitability, they have considerable long-term growth potential. Fundamentally, ICAP remains sound and over time it's likely that more normal market conditions will return. And with it forecast to record a rise in earnings of 11% in the next financial year, investor sentiment could improve following the deal with Tullett Prebon. That's especially the case since ICAP trades on a price-to-earnings growth (PEG) ratio of only 1.6.
Good news for Tullet Prebon
Of course, its global hybrid voice broking business continues to perform well. It recorded a rise in trading profit before tax of 28% to £59m in the first half of the year. Its trading profit margin rose by two percentage points and this indicates that Tullett Prebon's future performance is likely to be enhanced by the acquisition. With Tullett Prebon trading on a PEG ratio of 1.7, it has a wide margin of safety. Assuming the successful completion and integration of the broking business, Tullett Prebon's share price could increase following its 14% rise in the last three months.
The appeal of ICAP and Tullett Prebon becomes increasingly apparent when other financial services sector stocks are considered. For example, wealth manager Hargreaves Lansdown(LSE: HL) has a PEG ratio of 3.5, which indicates that it lacks appeal from a valuation perspective. Furthermore, ICAP and Tullett Prebon are undergoing significant changes that could lead to improved financial performance. While Hargreaves Lansdown has a successful track record of consistent growth, it lacks a clear catalyst for growth compared to either of the other two.
While the current operating environment for ICAP and Tullett Prebon is highly uncertain, a more stable outlook may lie ahead. With both stocks having low valuations and sound growth strategies, now could prove to be an excellent time for long-term investors to buy a slice of them.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.