At a price-to-earnings (P/E) ratio of 10, Hargreaves Lansdown (LSE:HL) shares are firmly in value stock territory. After a 17% decline since the beginning of the year, the stock looks set to fall out of the FTSE 100.
A falling share price can often be a sign that the underlying business is in trouble. But with profits reaching record highs this year as the stock falls, are investors looking at an incredible buying opportunity?
Record earnings
There’s no two ways about it, 2023 has been a great year for Hargreaves Lansdown business-wise. The company’s earnings per share benefitted from a double boost of higher revenues and wider margins.
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Overall revenues were 26% higher than in 2022 and wider margins meant earnings per share were up 49%. In general, this came from rising interest rates helping the firm’s cash savings division.
With the stock market going through some turbulence, its customers have been moving away from funds and shares. As a result, the company’s cash division increased revenue from £50m to £269m.
Higher interest rates also meant the margin on the firm’s cash products increased from 0.37% in 2022 to 1.92% in 2023. This more than offset declines in other areas.
Falling share price
Great – so why have the shares been going down? The answer is that the success of the company’s cash division doesn’t look like it’s going to prove especially durable.
It’s an unfortunate fact that investors tend to exit the stock market and move into cash when things start getting volatile. Despite the company anticipating more of the same in 2024, this won’t last forever.
After that, there’s a question of where earnings growth is going to come from. To answer this question, Hargreaves Lansdown has been spending on building out a personal financial advice business.
The trouble is, this has been expensive. And much to the dismay of one of the company’s founders, the spend on this looks set to increase further in 2024.
An opportunity?
If Hargreaves Lansdown could maintain its 2023 earnings per share indefinitely, the company’s shares would be an obvious bargain right now. But I don’t think investors should expect that to happen.
Over the last 10 years, the business has generated an average of 49.5p in earnings per share. At today’s prices, that implies a P/E ratio of around 15.
In my view, this means a lot comes down to whether or not the company can make a success of its advice project. If it can, then the stock could be a good investment, but if not, it could be an expensive mistake.
Despite a 6% dividend yield, the stock looks like a riskier proposition than I’d like. This could be a great time to buy, but I think the FTSE 100 has better opportunities for value investors like me right now.
