The share price of FlexiGroup Limited (ASX: FXL) has surged higher this morning after Credit Suisse upgraded the stock on the belief that its downgrade cycle is close to turning.
The stock surged 3.2% to $2.25 in after lunch trade and looks poised to break above June’s 14-month high of $2.29. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is up 0.5%.
Can the consumer financing group find favour with investors like Afterpay Touch Group Ltd (ASX: APT)? The latter has surged over 200% over the past 12-months and is among the best performers on the top 200 index for FY18.
This compares to Flexigroup’s 21% gain although there is more room for the interest-free solution provider to climb if Credit Suisse is to be believed.
But it’s probably fair to say that Flexigroup is unlikely to triple in price in FY19 as Afterpay had done last financial year.
“To be clear, this is not a ‘big upgrade’ story – it is more of a ‘no more downgrades’ story – but at an 8.7x FY19E PE [price earnings], we think that could be enough,” said Credit Suisse.
“For the first time in a long time, we think FXL has a reasonable chance of meeting consensus earnings expectations. Further, we think FXL can deliver modest growth in FY19 (as per our forecasts), or at least hold the current earnings base.”
There’s no doubt the stock is cheap as long as management doesn’t disappoint but it’s not without risks. The broker highlighted the downward trend for its leasing business and warned about the high risk of failure of its new consumer lease product.
Flexigroup is also facing stiff competition from the likes of Afterpay and the credit environment is such that impairments and funding costs could rise.
The negative consumer trends that have afflicted JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) are also likely to have an impact on Flexigroup, which has a much weaker online presence compared to Afterpay and other new fintech companies.
Even though Flexigroup could continue to see its stock re-rate, it is unlikely to fetch the same valuation as Afterpay.
Credit Suisse lifted its recommendation on Flexigroup to “outperform” from “neutral” with a price target of $2.45 a share.
There’s another group of stocks that have a much brighter future than Flexigroup, according to the experts at the Motley Fool.
Click on the link below to find out what these stocks are and why they should be on your radar for FY19.
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Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.