Comparison website Gocompare.com(LSE: GOCO) has risen by over 7% today following a strong update. It shows that the company is making excellent progress since its demerger and offers significant upside potential over the medium term. While growth of 40% may sound optimistic, a combination of a rapidly rising bottom line plus a low valuation could make it a highly attractive investment opportunity.
Gocompare posted a rise in sales of 19% in the 2016 financial year. This is in line with guidance, although its profitability is at the top end of market expectations. Adjusted operating profit of £30m is 30% higher than the figure achieved in 2015 and shows that the company's strategy is working well. Cash generation has also been strong, with leverage reducing from 2.8 times at the time of the demerger to less than 2 times at the year-end.
Looking ahead to next year, this impressive level of performance is expected to continue. Earnings are due to grow by 3% in 2017 and then by a further 21% in 2018. This has the potential to improve investor sentiment in the stock, especially since there's a sound strategy in place to grow profitability over the medium term. And with the management team having been strengthened since the demerger in October 2016, Gocompare is well placed to deliver consistently upbeat results.
Share price growth
If the company's rating was to remain at its current level, a growing bottom line should send its shares higher by around 25% over the next two years. However, there's scope for a significantly higher valuation since the price-to-earnings (P/E) ratio is relatively low. For example, Gocompare has a P/E ratio of 13.1. If this rose to 14.7 and the company hit its forecasts in 2017 and 2018, it would trade at over 100p per share. This would equate to a capital gain of around 40% versus the current share price.
A P/E ratio of 13.1 is very achievable on a standalone basis, given the upbeat medium-term outlook for the company. However, it's even easier to justify when compared to sector peer Moneysupermarket.com(LSE: MONY). It trades on a P/E ratio of 19.2 and yet its forecasts are less impressive than those of Gocompare. For example, Moneysupermarket is expected to post a rise in its bottom line of 8% this year and 9% next year.
Furthermore, Gocompare has superior income potential to its sector peer. It yields 2.4%, but this is expected to rise to 2.9% next year. Beyond this, further dividend growth is likely as higher profitability, plus a payout ratio of 30%, indicate that shareholder payouts should soar. This compares favourably to Moneysupermarket, which has a yield of 3.3% but pays out 64% of profit as a dividend. Therefore, its dividend growth prospects aren't as appealing as those of its sector rival.
As a result of this and its low valuation, high growth rate and sound strategy, Gocompare could appeal to growth, income and value investors alike. It's among the top risers today and could prove to be a star performer in 2017.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.