London Stock Exchange Group PLC (LSE:LSEG, Financial) is a leading stock exchange and data analytics provider. It was founded over 300 years ago in 1801 and is the 2nd-oldest stock exchange in the world after the Amsterdam Exchange.
In 2007, the London Stock Exchange Group was created when the London Stock Exchange merged with the Milan Stock Exchange. Since then, the combined company has become a leading financial data provider globally. They operate with high gross margins of more than 80%, have high recurring revenue of 73% and a strong moat.
Their latest acquisition of data analytics provider Refinitiv means they are poised to ride the growth in the big data industry, which is forecasted to reach $236 billion by 2026 according to Global Industry Analysts Inc.
Given these factors, I believe the stock is currently undervalued.
Business model
Despite being based in the U.K., London Stock Exchange Group PLC (LSE:LSEG, Financial) is surprisingly well diversified with 40,000 customers in over 190 countries. They make 42% of their revenue from the Americas, followed by EMEA (44%) and Asia (14%). The group uses an “open model approach” to identify opportunities and create value for the financial markets in three main areas:
- Data Analytics - 68% of income
- Capital Markets - 18% of income
- Post Trade - 13% of income
The Data Analytics segment is the largest by revenue and provides high value data and workflow solutions. The division is split into five sub areas:
- Trading & Banking Solutions
- Enterprise Data Solutions
- Investment Solutions
- Wealth Solutions
- Customer & Third-Party Risk Solutions
They provide this financial market data to more than 400,000 users, including 42 of the 50 largest companies by market capitalization, the top 30 banks and the top 10 asset managers globally as well as the leading global index and benchmark company (FTSE Russell). Ninety-three percent of the revenue generated in this segment is recurring, which is fantastic in terms of stable cash flows.
The Capital Markets segment provides business capital through issuance and secondary market trading for equities, fixed income and foreign exchange. This segment makes up 18% of income with 37% recurring.
The Post Trade segment provides transaction clearing, risk management and regulatory reporting solutions. This makes up 13% of income with 32% recurring. The London Stock Exchange Group has recently acquired global financial data giant Refinitiv for $27 billion from Blackstone Group LP and Thomson Reuters, which owned 45%.
Financials
The London Stock Exchange Group generated revenue of 6.7 billion British pounds ($8.2 billion) for fiscal year 2021, up substantially from £2.4 billion in 2020, which was mainly driven by acquisitions.
For the first quarter of 2022, total income increased by 6.3%, with 73% recurring.
London Stock Exchange Group operates with super high software-like gross margins of 87%. They also have a healthy 21% operating margin, which is near the 25% average for the software industry.
The company has £1.3 billion in cash and a large amount of debt at £7.6 billion. The group recently sold off the Borsa Italiana Group to Euronext for 4.4 billion Euros ($4.6 billion), which was used to significantly reduce the debt levels.
Valuation
The GF Value chart indicates the stock is undervalued relative to historic levels but also warns of a possible value trap due to the deteriorating balance sheet.
Overall, London Stock Exchange Group is an incredible company which has high margins and is poised to benefit from the growth in big data. There is only one London Stock Exchange, which should also give this company a competitive advantage or “moat." Their high recurring revenues are also an added bonus and their established customer base looks to be very sticky. The only risk I see is the high debt levels and potentially slow growth from their core business.
