12 Stocks of Christmas: Relx

Relx (LON:REL) is always one of the top performers in the FTSE 100. Its shares are up 17% in 2024 and it’s currently the sixth biggest company in the UK.

But despite being a consistently high performer which rarely lets down its shareholders and pays a healthy dividend along the way, it’s often hard to justify an entry point.

At the time of writing shares are trading on 28 times forecast earnings, which is towards the top end of the recent range, but Relx PE ratio rarely falls below 25x. The free cash flow yield of just over 3% is perhaps slightly more appealing from a valuation perspective, but only just. Relx is definitely not a value stock.

But I am not a value investor. I look for stocks that can provide long term compounding returns and in that respect, Relx definitely ticks a lot of boxes.

The company generates sales from four distinct divisions which all have very sticky customers. In scientific and legal, the company boasts a number of key brands for academic and legal professions. And in risk (the largest and fastest growing business division), customers include many governments and major global corporations. Sales have risen at a compound annual rate of 7% over the last five years, which accelerated to 7% in 2023. The company is forecast to generate annual revenue of over £10bn for the first time in FY2025.

Sticky customers mean gross margins are high. The biggest cost of sales come from running the huge databases. The company also has a decent degree of operating leverage, meaning margins have expanded as sales have risen. Last year operating margins rose to just shy of 29% and have risen further over the prevailing 12 months.

The company is also very good at squeezing profits from its working capital. Return on capital employed (ROCE) has averaged 23% over the last five years and rose to 30% in the last 12 months. Return on equity, which measures the profit generated from every £1 of net assets was 50% last year.

Cash conversion is also excellent. Operating cash inflows tend to exceed operating profits, meaning the company converts every penny of its operating profits into cash. Management doesn’t shy away from spending that cash. Capital expenditure has almost doubled in the last decade to £477m, largely invested in acquisitions.

The only weak spot in the company’s quality argument is its net gearing, which currently exceeds 200%. The £6.8bn of total debt is split between a small portion of short term borrowing and over £6bn of long-term debt, £1bn of which is due within a year. It’s a debt position which has made some investors nervous during a period of high interest rates, but the company’s borrowing is well hedged across different geographies and well managed by the company’s impressive chief financial officer.

Is Relx position to keep growing?

But quality alone is not enough to justify the kind of valuation ratios seen at Relx, the company must also be growing.

And, by and large, it is. Earnings have risen from 76p per share five years ago to 98p in 2023 and numbers have beaten forecasts in every one of those years. In the last year, 2024 and 2025 earnings forecasts have come down slightly, but they’re still expected to be 121p and 131p respectively - material growth on previous years.

More significant for me is the company’s exposure to the tech sector and, especially artificial intelligence. The company’s risk business, which provides data analytics to major customers, is especially well positioned, because it owns and manages huge databases.

These databases provide a formidable barrier to entry and are likely to be in high demand as AI models are trained and expanded. AI relies on access to high quality data (large language models, for example, are only as good as the data on which they are trained) and so Relx products and services could be in high demand as AI becomes more prevalent.

The risk business is already benefiting from shifting dynamics of various markets. Demand has risen for financial crime and fraud investigations, especially in the insurance market which is battling with shifting dynamics.

Relx is a fabulous business and while many tech investors look stateside for their AI exposure, it’s important not to overlook our homegrown talent. And I think Relx is among the best.