Reflecting back on some leading FTSE 100 companies, I wonder how they flew under my radar undetected for so long. In hindsight, it seems obvious that such businesses would rise to fame but at the time, I barely noticed.
One such company is RELX (LSE:REL).
Up 100% in five years, I’m wondering whether I missed out on this one – or has it got more tricks up its sleeve?
Two decades of transformation
RELX is a global analytics and decision tools provider that found success recently following a shift in focus to artificial intelligence (AI). The company previously operated a publishing and media business but began adopting a more data-focused strategy when the internet threatened print media in the mid-2000s.
Today, almost 45% of RELX’s profit comes from its LexisNexis Digital Identity Network.
The software is used by banks and insurance companies across 180+ countries worldwide to verify user identity. The move to analytics has helped RELX become the eighth-largest company on the FTSE 100. It’s arguably one of the UK’s most successful tech companies, investing £1.2bn annually into IT development.
Crunching the numbers
A great transformation is one thing, but that doesn’t mean RELX will deliver in the long term. Since it combines detailed content with sophisticated analytics to deliver its industry-leading service, I’m going to do the same to evaluate its worth.
Its balance sheet already flies a few red flags – £6.64bn of debt? Ouch.
With only £3.2bn worth of shareholder equity, that debt isn’t well covered – neither in the short term nor long term. (Its debt-to-equity (D/E) ratio is over 200%.)
But with £14.5bn in total assets, it more than covers its liabilities, so the money’s there if worst comes to worst.
But I don’t think that’s a concern.
From my perspective, RELX isn’t a company that’s going away any time soon. As noted above, it has a spectacular track record of overcoming adversity. And don’t just take my word for it – analysts are rooting for it too.
Forecasts predict RELX’s revenue to grow at 5.2% per year, leading to a future return on equity (ROE) of 58% in three years.
However, I’m concerned that the share price may be above fair value here. RELX has both a high price-to-earnings (P/E) ratio and price-to-book (P/B) ratio (35.25 and 1.89 respectively.)
To me, it seems like RELX is a company that’s doing well and knows it’s doing well. However, the market might be a little overconfident about how well it’s doing.
My verdict
With a share price up 37% in the past year alone, traditional logic tells me RELX is overbought. Analysts also put it at 20% overvalued. However, tech companies have a funny way of making consistent gains these days.
Notably, RELX has a low dividend yield at only 1.7%, so it has little more to offer beyond the promise of future growth.
Overall, I think RELX’s potential for growth outweighs its risk of decline. Even if it needs to go through another transformation to achieve it, I believe RELX could be the company to pull it off successfully.
I’ll keep an eye out for a good buying opportunity in February.
And this time around, I’m not going to miss the boat.
