There are many cheap stocks within the FTSE 100 index at the moment. Right now, a lot of companies have low valuations.
Yet there is one company in particular that strikes me as a real bargain. To my mind, this stock is just way too cheap at the moment.
One of the most profitable Footsie companies
The company I want to highlight today is Hargreaves Lansdown (LSE: HL.). It operates the UK’s largest investment platform. Founded in 1981, it has around 1.8m customers and assets under administration of around £140bn.
From a long-term investment perspective, there’s a lot to like about Hargreaves Lansdown. For starters, the company has considerable growth potential. Not only does it look set to benefit as Britons save and invest more for retirement, but it should also benefit as global equity markets rise over time, pushing account balances (and fees) up.
One thing it has going for it is that once people start investing with a platform, they generally don’t switch around much. In the six-month period to the end of 2023, for example, client retention was 92%.
Secondly, the company is very profitable. Over the last five years, return on capital has averaged 62%. That makes it one of the most profitable companies in the FTSE 100. Firms that generate a high return on capital often turn out to be good long-term investments as they have substantial profits to reinvest for future growth.
Third, it pays a decent dividend. Last financial year (ended 30 June 2022), the company paid out around 40p in dividends. That equates to a yield of around 5% at today’s share price. It’s worth noting here that the company has a good track record when it comes to dividend growth.
Finally, it has a strong balance sheet with no debt.
Low valuation
Yet despite all these positives, the shares have a very low valuation. Currently, the forward-looking price-to-earnings (P/E) ratio here is just 12.3. That’s lower than the FTSE 100 median P/E ratio.
At that multiple, I see a lot of value on offer here.
Why are the shares so cheap? Well, there are a couple of issues that have spooked investors recently.
One is competition from new rivals. In recent years, a number of new retail investment firms have sprung up. Many of these firms offer lower fees than Hargreaves Lansdown (or no fees at all).
To remain competitive, Hargreaves will probably have to lower its fees. This could hit revenues and profits in the short term.
The group’s reputation has also taken a hit in recent years on the back of the suspension of Neil Woodford’s investment fund. Hargreaves Lansdown has denied any wrongdoing but it has been hit by a lawsuit on behalf of thousands of Woodford investors and may have to pay out damages.
These issues shouldn’t be ignored and definitely have the potential to impact profits.
However, all things considered, I see a lot of value in the stock right now. To my mind, the share price should be higher.
