The Familiar Name Profiting From Italy's Debt Crisis

Published in Company Comment on 17 November 2011

This institution is making money from troubled Italian banks.

While a lot of companies are struggling and investor confidence keeps hitting low points, the London Stock Exchange (LSE: LSE) itself is doing pretty well.

At least, that's the picture that emerged from Wednesday's interim results, which saw pre-tax profits leap by 79%, to £180m, while revenues rose by 9% to £328m.

The improved performance was largely a result of revenue boosts from the company's Italian clearing business, where it reaped considerable rewards from making overnight loans to Italy's troubled banks struggling to contain the country's escalating debt crisis.

Diversification going well

So far, at least, the LSE's policy of expanding beyond straight company listings and share dealing seems to be paying off, with overnight markets looking like a good place for it to park its funds when they're not being actively used.

In further diversification, the LSE is planning to acquire a chunk of UK-based clearing house LCH.Clearnet, and is thought to have further acquisitions up its sleeve.

In the words of chief executive Xavier Rolet: "Our balanced and diversified business, with a well-hedged, inversely-correlated portfolio of products and services, makes us strongly placed to take advantage of growth opportunities that the changing market and regulatory environment is presenting."

The LSE has seen its shares struggling in recent years as changing regulations have led to a number of new competitors moving into the trading business, and although the price has recovered from the depths of the banking crisis, this year it has significantly lagged the FTSE All-Share.

A strong future?

But despite the short-term future remaining pretty fraught for anyone in this line of business, the LSE's diversification strategy makes the firm look a decent long-term possibility to me.

Adjusted interim earnings per share beat expectations, coming in at 47.6p, which is an impressive 48% rise on the first half of last year, and a 9.3p per share dividend was declared, up 6%.

These interim figures should provide a fillip to end-of-year forecasts for March 2012, and the current share price (which barely moved on the day of the results), suggests a forward P/E of around 9 and a dividend yield of close to 4%.

While there are cheaper shares out there, the LSE remains a business much in demand, even during financial crises, and its expansion should help it make more of the market opportunities available in such times.

Would I buy the shares? Not without further analysis, but I'm certainly adding the company to my watch list.

More from Alan Oscroft:

> Worried about the eurozone? Then download The Motley Fool's special report -- What To Do When The Market Crashes -- while it's still free and available!

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BarrenFluffit 17 Nov 2011 , 12:24pm

"Inversely correlated" implied that the future will be the same as the past. In investment correlation has been shown as a reliable tool except when its needed.
But certainly being the ringmaster has more appeal than the lion tamer.

TMFBoing 17 Nov 2011 , 12:58pm

At least it sounds like they're using "hedged" according to its proper meaning ;-)


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