Bus waiting in front of the London Stock Exchange on a sunny day.
At first glance, the share price of Hargreaves Lansdown (LSE: HL) strikes me as attractive. Trading on a price-to-earnings ratio of 10 and with a dividend yield close to 6%, the shares seem cheap.
But is the Hargreaves Lansdown share price the potential bargain it seems to be?
Valuing the business
The answer to that, as with any business, involves looking at what the business is likely to be worth over the long term and how that compares to its current share price.
Profit before tax last year was a smidgen over £400m. That is impressive for a company with a market capitalisation of £3.3bn. But it is worth noting that it was a big jump from the prior year, when profits before tax came in at £269m.
The fact that the business is consistently profitable is a positive attribute in my book. But what about that big swing in profit? Hargreaves Lansdown can see revenues and profits move around based on whether people have cash to invest and how wiling they are to put it into the markets. That can lead to sudden jumps in financial performance – but it is also an ongoing risk to both revenues and profits.
Set against that, though, there are some notable strengths to the business.
It has a well-established brand, established customer base, and operates in a market where profit margins can be attractive. Last year, for example, revenue was £735m. So to turn a profit after tax of £403m implies a net profit margin of 55%. Many businesses would love to have such juicy margins.
Looking forward
What about the future?
In a trading statement last month, the stockbroker said that the first three months of its latest financial year had seen revenues 13% higher than the same quarter last year. Net new business was £0.6bn and it saw net new client growth of 8,000, pushing its active client base to over 1.8m.
But share dealing volumes fell, reflecting the fact that the business tends to be susceptible to wider market trends when it comes to stockbroking volumes.
Over the long term, I think the business ought to be able to play to its strengths. But, if stock market volumes in general fall (for example, because investors prefer to sit on cash) that could lead to lower revenues and profits.
Good not great
So although I think the Hargreaves Lansdown share price looks cheap based on last year’s earnings, I expect earnings could move around quite a bit in future.
A large reason for that is the general level of stock market activity, something outside the firm’s control.
While I see the large customer base as attractive, I also think there are fairly low barriers to entry in the industry. As a Hargreaves Lansdown customer myself I do not consider that the business has a strong, unique competitive advantage. If it pushes prices up too much, I expect a lot of customers would move their business.
So, for now, I have no plans to buy Hargreaves Lansdown shares.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions,
he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy
— and discover:
- Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
- How to potentially get paid by the weather
- Electric Vehicles’ secret
backdoor
opportunity - One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
News Related-
China's New Aircraft Carrier Begins Catapult Testing
-
Aircraft Downed Inside Russia By Patriot System: Ukrainian Air Force
-
“Am I Prog’s Taylor Swift? That’s a debate that could run and run”: why Peter Hammill re-recorded his Enigma-era albums
-
Car With Pro-Russian Fighters Blown Up by Resistance: Exiled Mayor
-
Europe and African nations must find effective common ground in dealing with migration influx
-
Springbok lock opts not to renew contract with URC team
-
Pravin Gordhan’s deathly legacy: A threat to SA’s economic future
-
Antoine Dupont STILL hurt by ‘injustice’ of Rugby World Cup loss to Springboks
-
Rubber stamping NHI Bill will have damaging consequences for SA for generations
-
Inside horrific conditions Hamas hostages suffered including losing 15lbs in 50 days
-
After the Bell: SA’s NHI healthcare disaster starts right here
-
Gupta-linked development land for sale
-
Gary Neville begrudgingly claims brilliant Man Utd midfielder ‘looked like a Man City player’ in Everton mauling
-
Volkswagen "very worried" about the future of its operations in SA