The past five years has seen a collapse of more than half in the share price of stockbroker Hargreaves Lansdown (LSE: HL). But in the past year, Hargreaves Lansdown shares have moved up 7% — and they have jumped 17% in the past few weeks alone.
Might that be the start of a turnaround for the shares? If so, could it make sense for me to add them to my portfolio?
Strong quarter
Last week, the firm updated the market on its performance in the most recent quarter.
I thought the headline performance was strong. Compared to the three months before, net new business grew 6% and there was net client growth.
That said, with the end of the annual ISA season falling during the period, I am not surprised that Hargreaves Lansdown had a decent quarter.
Medium-term outlook
But the company noted that share dealing volumes in the period fell compared to the prior-year period, saying that “investor confidence across the quarter has been low”.
That concerns me as I think it could be more than a one-off phenomenon.
The company said factors such as cost-of-living issues and market volatility contributed to lower trading volumes by its customers. I fear such factors could continue to weigh negatively on the outlook for Hargreaves Lansdown shares in the medium term.
Possible bargain
As a long-term investor, though, I continue to see strength in the company’s large customer base and strong brand.
Stockbroking can be a highly profitable business: last year the company made a post-tax profit margin of £216m on revenues of £583m. That equates to a net profit margin of 37%.
But those profits were actually smaller than five years ago. While the firm has grown its revenues during that period, profits have fallen.
I see a risk that this trend of falling profitability could persist.
Competition is strong and could grow. A loyal customer base is one asset I think could help Hargreaves Lansdown, but in a competitive market the firm could still suffer if rivals try to build their own market share by undercutting it on price.
But the shares now yield more than 4%. That yield appeals to me.
The shares trade on a price-to-earnings ratio of 18. I do not see that as cheap. But the share price could still potentially turn out to be a bargain if the company grows its earnings in coming years.
No rush
The concern I have, however, is that earnings might fall rather than rise in coming years. Transaction volume has fallen — and the drivers for that could continue to apply.
With less disposable cash, fewer investors may buy and sell shares, cutting into revenues and profits at the company. If it tries to compensate by pushing up prices, it risks losing ground to rivals.
For now, I see no rush to invest in the company. For a real turnaround in the share price to keep gaining ground, I think the company will need to show consistent evidence of strong business performance. Until that happens, I have no plans to buy,
