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Jupiter Fund Management (LSE:JUP) stock is up over 10% in trading today (10 July), pushing the FTSE 250 share to fresh 52-week highs. Despite this, the price-to-earnings (P/E) ratio of the company is 8.09, below the fair value benchmark of 10 I use when picking stocks. Here’s why the stock is rallying and why I think it could keep moving higher.
Reason for the spike
The big news that has caused the leap today was confirmation of the acquisition of CCLA for £100m. CCLA is the UK’s largest asset manager focused on serving non-profit organisations. This means the managers look after funds for charities and religious organisations.
CCLA currently manages about £15bn of assets under management. This is the key metric that firms in this sector look at, as the fees they charge depend on how much is being managed. The bonus for Jupiter is that currently it looks after £44.3bn. So the size of funds being added from this move is significant.
CEO Matthew Beesley noted another benefit of this deal. He said “it opens up a new client segment for us, broadening our appeal to a range of charitable and religious institutions, both in the UK and internationally“. To tap into a different client base than Jupiter usually targets means there’s no conflict of interest from existing clients.
Still undervalued
Over the past year, the stock is now up 33%. Aside from the move today, the business has benefited from stronger financial results. This has included higher underlying operating margins, along with earnings per share and net income numbers that have topped estimates.
Yet, based on the current share price, the P/E ratio indicates to me that there’s further room for it to move higher. In comparison, competitors such as St. James’s Place (16.55) and Liontrust Asset Management (14.65) have higher ratios. If I factor in a P/E ratio of 15 for the coming year for Jupiter and assume the earnings per share stays the same, this would mean the share price would have to increase by 84%!
This isn’t guaranteed. The business has risks associated with it, such as the reliance on star fund managers. Last year, the departure of Ben Whitmore saw billions move out of Jupiter, highlighting the dependency on good performers who are loyal to the company.
Further, we’ll have to wait and see how well the integration with CCLA goes. Even though it should be a large win, there could be short-term headaches in joining together.
Even with these concerns, I think the company is in a good place right now, and the future looks bright. Given the valuation metrics I’ve gone through, I’m seriously thinking about buying the stock to add to my portfolio.
