CMC Markets plc's 29% profit fall masks appeal of spread-betting stocks
Today's half-year results from CMC Markets(LSE: CMCX) are disappointing. The company has recorded a fall in revenue of 4% and a decline in earnings of 29%. This has pushed its share price down 5% today. However, over the medium term, CMC Markets and its spread-betting peers could prove to be sound investments due to a potential rise in market volatility.
CMC's first half saw client trading activity come under pressure. Revenue per active client declined by 13% to £1,488 amid a challenging wider market. Although this was pointed out at the company's AGM in September and a share price fall of around 30% swiftly followed, investors continue to be bearish on CMC's future prospects. Evidence of this can be seen in the recent weakness in its share price.
However, CMC's growth strategy appears to be sound. It was able to grow the number of active clients in the first half of the year by 8% and increased client assets by 32%. Although underlying operating costs rose by 9%, this reflects the investment being made in headcount and marketing in order to support its long-term growth targets.
Furthermore, CMC continues to increase its geographic diversity through the opening of an office in Poland last year. Its performance there has been in line with expectations, while the value of client trades in its French office has risen by 37%. Meanwhile, new opened accounts have increased by 15% across the company, aided by an improvement in online advertising and optimisation for mobile devices.
A better year ahead?
Looking ahead, the difficulties which CMC and sector peers such as IG Group(LSE: IGG) have experienced this year could subside. In fact, they may be replaced by more positive trading conditions in 2017. Spread-betting companies tend to perform relatively well during periods of high volatility, since they provide an opportunity for customers to benefit from wild swings in asset prices. With a Trump presidency and Brexit likely to dominate headlines next year, uncertainty and volatility could be high.
CMC is forecast to grow its bottom line by 15% next year. This puts it on a price-to-earnings growth (PEG) ratio of 0.8, which indicates that it offers a wide margin of safety. IG also offers good value for money. Its earnings are due to rise by 13% next year, giving it a PEG ratio of 1.2. As such, CMC appears to offer superior potential rewards, although IG has a more stable track record of profit growth. This means IG offers less risk while also being in a position to benefit from potentially higher volatility in 2017.
Certainly, CMC's performance in the first half of the year has been disappointing. And it would be unsurprising for its share price to fall in the short run. However, alongside IG it offers significant capital growth prospects for 2017, with IG's lower risk profile making it the more enticing of the two companies at the present time.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.