Flexigroup: Has it flown too close to the sun?

Share price has climbed 77% since February

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 14, 2012 5:12 pm AEDT

Back in February this year, Flexigroup Limited (ASX: FXL) was trading on a forecast P/E of 9.3 and paying a fully franked dividend yield of 5.5%. I suggested at the time that the stock looked very interesting and was deserving of a closer look.

Since February, the company has seen its share price rise over 77%, and is now trading on a P/E of over 18 while paying a relatively low dividend yield of 3.2%.

Flexigroup is a diversified financial services business that started out offering flexi-rent plans for businesses and retail customers. It has now diversified its business, with its flexirent division contributing just 39% of receivables (a financial services version of revenues) in 2012. Its products are now offered through 11,000 partners, including Apple resellers, Harvey Norman, IKEA and Fantastic Furniture, and the company competes against the likes of Thorn Group (ASX: TGA), Cash Converters (ASX: CCV) and Thinksmart Limited (ASX: TSM).

The company expects further strong growth in 2013, as it expands on the opportunities created by recent acquisitions and a new organic business. Cash net profit is expected to increase by 11% to 16% for the 12 months to 2013, and Flexigroup has even predicted that 2014 will show strong growth on the back of lower interest rates, further integration between its businesses and sharing of core operations such as systems and credit.

However, the market appears to have priced the company for perfection. Consensus forecasts suggest analysts believe the company will grow earnings per share by 12% in the 2013 financial year, and 13% in 2014. At the current price of $3.93, that puts Flexigroup on a prospective P/E of 16.4 in 2013. The dividend yield is expected to be around 4%, based on the current price.

The problem is that any downturn in the economy could see the company hit by a number of issues, including bad debts, a slump in new business, and rising interest rates – which could put pressure on its debt repayments. All three could see its earnings and dividends crunched.

The Foolish bottom line

I could be wrong, and the company may very well surprise the market by growing earnings by more than analysts expect. The problem is that at current prices, any hiccup could see the company's share price plummet, as overly optimistic assumptions about its growth are deflated.

If you only invest in one company this year, make it our "Top Stock for 2012-13". Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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