Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) to ascertain if it can make £20 billion in profit.
Have we been here before?
A great place to start assessing whether or not HSBC can make £20 billion in profit is to look at the company’s historic performance. Unfortunately, it would appear that HSBC has never been able to make a £20 billion profit but it would appear that the company is well positioned to do so.
For example, according to HSBC’s interim management statement, released at the beginning of November last year, the banks reported profit for the first nine months of 2013 had jumped 15%, to around £12 billion, compared to same period the year before.
But that’s not all. No, during 2013 all of HSBC’s key profitability, performance and capital metrics improved. In particular, the bank’s tier one capital ratio increased 1% to 13.3% during the year, operating expenses dropped 4% and the company’s return on equity ticked up to 10.4%, compared with 8.9% for the equivalent period in 2012.
But what about the future?
After putting in an impressive performance for the first nine months of 2013, City analysts are extremely positive on HSBC’s future outlook, and so am I. Indeed, I feel that it is only a matter of time before the company churns out annual profits of £20 billion.
According to City forecasts, HSBC’s full-year 2013 results, slated to be released at the end of February, will reveal a pre-tax profit of around £15 billion for the period. Further, analysts believe that the banks pre-tax profit will rise to £16 billion for full-year 2014, then £18 billion for 2015. With these forecasts in place, I feel that the bank could reach my £20 billion target by 2016.
If HSBC does hit my profit target, my calculations show that this will equate to earnings per share of 76p, which makes the bank look quite cheap at current levels.
Moreover, HSBC is one of the few banks in the world that is flush with cash, reporting a free cash flow of £13 billion for full-year 2012. Actually, this cash flow is so impressive some City analysts believe that a large return of capital is on the cards for HSBC’s shareholders. This return of capital could be in the form of share repurchases, or bigger dividend payout — both of which are attractive.
Foolish summary
So overall, I feel that HSBC can make £20 billion profit.
