Hargreaves Lansdown (LSE:HL.) is in danger of falling out of the FTSE 100, as it’s among the stocks on the lead index with the lowest valuation. Several FTSE 250 stocks are now worth more than the brokerage.
The FTSE 100 stock has fallen significantly since the pandemic and, in recent months, the downward trajectory has reflected rising interest rates. However, these also represent a considerable tailwind for the brokerage.
So let’s explore the size of this tailwind and whether Hargreaves could be the most undervalued stock on the FTSE 100.
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Piecing together the evidence
We don’t have the full picture, but there are several key pieces of information here. Firstly, in the first half of the year, which ended on 31 December, we can see revenue rose 20% at £350m.
This was driven by 976% increase on cash holdings — cash held by Hargreaves Lansdown customers on the brokerage platform. This was possible because Hargreaves lends its customers cash deposits out to the market.
Cash during H1, was actually Hargreaves’s most profitable asset class. It generated £121.6m in returns and had a 166 basis point margin. Cash assets under administration were £14.5bn at the end of the quarter.
However, obviously the Bank of England base rate increased significantly in the first half of 2023, going from 3.5% to 5%. As such, we could expect returns on cash to be even higher in the second half of the year.
A record year
Traditionally, most of Hargreaves income comes in the form of fees on investor accounts and dealings. However, investor activity has slumped during the worsening economic conditions. Activity will likely only improve when interest rates start to fall and economic conditions improve.
Despite this, 2023 could be a record year for Hargreaves. Revenue generation is on track to outpace any year to date, even the ‘extraordinary’ 2021.
| 2019 | 2020 | 2021 | 2022 | 2023 |
| £480.5m | £550.9m | £631m | £583m | ? (H1, £350m) |
We can also see that in the first half of the year profit before tax was up a phenomenal 31%. Diluted EPS was up 29% to 33.1p. Clearly, there’s little sign that costs are increasing in tandem with revenue.
Making the conservative estimate that this performance is matched in the second half of the year, Hargreaves could be trading at around 11.5 times forward earnings. That doesn’t means it’s the cheapest stock on the FTSE 100, although it’s below average.
But to put this figure into context, Hargreaves Lansdown’s adjusted P/E ratio for fiscal years ending June 2018 to 2022 averaged 29.4 times. As such, we can also note the firm is trading at a considerable discount to its five-year average. It may be hard to find this type of discount anywhere else on the index.
So while it may take some time before we see strong trading activity return, the business is flourishing.
