Some top FTSE 100 earnings updates are coming in this week. And today it’s the turn of Hargreaves Lansdown (LSE: HL.) shares to respond negatively. By early afternoon Wednesday, the price was down 7.5% on the back of first-half results.
The stock has now lost a third of its value in 12 months, and close to 50% over the past five years. So what’s been going wrong with the business? Well, not a lot really.
I think we’re mostly just seeing a deserved correction, from a company that had become seriously overvalued. The investing services firm had been a big investors’ favourite, and the shares had been climbing steadily since around 2010.
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Valuation
But that brought an element of growth share overvaluation. At the peak in 2019, the shares were trading on a price-to-earnings (P/E) multiple of over 60 based on trailing 2018 earnings.
The correction was accelerated by a fall in earnings in 2022. And at today’s share price, we’re now looking at a trailing P/E of 19, with forecasts putting it at around 17 for full-year 2023. That might just represent good value now.
Hargreaves Lansdown reported 1,768,000 active clients of 31 December, an increase of 31,000 in the half. And revenue increased by 20% year on year. But net new business declined to £1.6bn, from £2.3bn in the first half of the 2021/22 year.
Investor pressure
Still, the six months to December did bring soaring inflation and interest rates. So I’m not surprised if people had less cash to invest. Assets under administration increased by 2.3% to £127.1bn. But the FTSE 100 itself gained 3.9% over that period. So that’s a relative underperformance, though a modest one.
Still, underlying profit before tax did rise by 30%. That’s from a weak prior year, but it still seems impressive to me. And the company lifted its interim dividend by 3.6% to 12.7p per share.
So where’s the negativity coming from?
Gloom
Well, a good portion of the £1.6bn in new business went into cash savings products. And chief executive Chris Hill spoke of “challenging external conditions and low investor confidence.”
A good few investors, it seems, are fleeing the uncertainty of the stock market and are seeking safety. I always think that’s a mistake, as times of market weakness can be among the best moments to buy shares for the long term.
The update added that the “uncertain economic environment and market conditions are likely to continue to impact investor confidence and in turn, net new business and dealing volumes.“
Verdict
I don’t see any great surprise there. But the negative reaction is typical for highly-valued stocks when a company’s outlook comes under pressure. And it’s also characteristic of high-flying growth stocks once the initial bullishness has worn off.
I do think Hargreaves Lansdown shares deserve a premium valuation. Forecasts for the full year might be downgraded now, and I suspect that could leave us a forward P/E of around 20. But for such a strongly cash-generative company, I feel that could represent attractive long-term value.
