There's an ASX-listed company that will soon deliver its lowest earnings in almost 10 years, but multiple experts think it's currently ripe for buying.
And this is despite the fear of rising inflation permeating the market.
Watermark Funds Management portfolio manager Harry Dudley said that a competent value investor will buy up cyclical stocks on high multiples at the bottom of their earnings cycle.
"This is when earnings have troughed," he posted on Livewire.
"Computershare Ltd (ASX: CPU) will soon deliver its lowest earnings per share in nearly a decade and this presents that opportunity."
Computershare will boost profits as inflation rises
One of the best things about the share registry provider is that its bottom line will improve as inflation rises.
This is because Computershare will temporarily hold dividends and acquisition or buyback proceeds before they're handed out to shareholders.
"Balances have averaged around US$16 billion over the past 5 years. From that… Computershare has collected nearly $1 billion of revenue (margin income) over the same time," said Dudley.
"Given costs are minimal for management of these balances, it falls nicely to the bottom line, at nearly a 100% profit before tax (PBT) margin."
Computershare is currently struggling because the return from this pool of cash is so poor with near-zero interest rates around the world.
"Computershare's margin income earnings have fallen 60% in 2 years."
But rates can only go up from here, which bodes well.
According to Dudley, if market expectations of interest rates are right, this side of the business would earn an additional profit before tax of about $415 million in the 2025 financial year.
To compare, the entire company is expected to rake in profit before tax of $460 million for the 2022 financial year.
"Looking at it another way, Computershare's base business could have no growth and the group would deliver 90% profit before tax growth over the 3 years," he said.
"This equates to an annual growth rate of 24%."
Not the only one bullish on Computershare
Computershare's inflation-dependent fortunes is similar to investment platforms Hub24 Ltd (ASX: HUB) and Netwealth Group Ltd (ASX: NWL).
They hold large pools of uninvested cash, which they lend out to the major banks.
"Computershare may be a boring business, but it holds significant upside potential," said Dudley.
"We also consider [it] our best position to protect a portfolio against any runaway inflation."
And he's not the only expert who thinks the share registry provider is about to explode.
Wilson Asset Management portfolio manager John Ayoub picked Computershare as one of two finance stocks to watch, along with Challenger Ltd (ASX: CGF).
"There are still pockets of opportunity emerging in financials," he told a company video last week.
Computershare stocks were down 0.58% on Friday, to close at $17.10. They started the year at $14.40.
