Should you sell Lloyds and buy Numis Corporation plc after it reports 25% profit hike?
Institutional stockbroker and corporate advisor Numis(LSE: NUM) has reported a 15% rise in sales today. This has pushed its top line to the highest level in its history and shows that its strategy is working well. It has significant future growth potential, which could make it a sound buy. Could it even be a superior stock to own than Lloyds(LSE: LLOY)?
Numis's revenue growth was spread across all the divisions of the business. Equities revenue rose by 15%, while its Corporate Broking & Advisory division saw its top line increase by 14%. Despite this, there was no increase in staff numbers, which means that revenue per staff member is likely to compare favourably to industry peers.
This allowed pre-tax profit to rise by 25% even though trading conditions were tough. Perhaps the main feature of 2016 has been the uncertainty that has been prevalent for most of the year. The fact that Numis was able to perform well in such circumstances provides encouragement to its investors, since it shows that a successful franchise has been built with better defensive qualities than may be the case for sector peers.
Numis is forecast to increase its earnings by 13% in the current year. This has the potential to improve investor sentiment in the stock since it's around double the rate of growth of the wider index. Even so, the company trades on a price-to-earnings (P/E) ratio of only 10. This equates to a price-to-earnings growth (PEG) ratio of 0.8, which indicates that there's a wide margin of safety on offer. In fact, if market conditions worsen and guidance is downgraded, a significant fall in share price could be avoided simply because of Numis's low valuation.
By contrast, financial services peer Lloyds is expected to record a fall in its bottom line of 16% this year and a further 7% next year. While this has the potential to hurt investor sentiment, the reality is that the market appears to have already factored-in the company's disappointing outlook. Using next year's earnings forecast, Lloyds trades on a P/E ratio of 9.2. Considering that the bank is more efficient than most of its peers, has a sound strategy and passed the recent stress test with room to spare, it seems difficult to justify such a low valuation.
The better buy?
Clearly, both stocks are strong buys at the moment. While Numis has the superior outlook, Lloyds is cheaper and also offers greater size and scale. The market has also adapted to Lloyds' difficult outlook, which means that there's arguably greater scope for an upward re-rating over the medium term. Lloyds also has a more diversified business model than Numis and while it may underperform its sector peer in the short run, Lloyds has a superior risk/reward ratio for the long run.
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Peter Stephens owns shares of Lloyds Banking Group and Numis. 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.