2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it probably has further to run.
Although the FTSE 100 has slipped back from its five-year high of 6,875, which it hit in May, it is still up by 8.8% so far this year, and is 53% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) still offer good value, after five years of market gains.
Back to basics
Billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
HSBC has missed out on this year’s rally, and its shares currently trade at almost exactly the same price they were at in January. However, the bank’s fundamentals have improved during the course of the year, in my view, and its regulatory core tier 1 ratio of 13.3% confirms that its balance sheet is in very robust shape — so is it a buy?
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 12.3 |
| Trailing dividend yield | 4.5% |
| Cost efficiency ratio | 56.6% |
| Net interest margin | 2.2% |
| Price to tangible book ratio | 1.4 |
HSBC’s 2.2% net interest margin may seem modest, but it’s in line with, or better than, other UK banks. The bank’s trailing P/E of 12.3 and 4.5% dividend reflect an undemanding valuation that’s based on the expectation that the bank’s stable performance and steady, if unspectacular, growth, will continue.
However, HSBC’s cost-savings programme has delivered $4.5bn of sustainable savings since the start of 2011, reducing its cost efficiency ratio to 56.6%, and I think there could be more gains to come.
What’s next for HSBC?
HSBC caused a flurry of excitement in the financial press on Monday, when the Financial Times ran a story suggesting that the bank might float 30% of its UK banking business. Such a move might help HSBC’s non-UK business command a higher valuation, but assuming the world’s local bank stays in one piece, let’s look at the outlook for 2014:
| Metric | Value |
|---|---|
| 2014 forecast P/E | 10.5 |
| 2014 forecast yield | 5.3% |
| 2014 forecast earnings growth | 13.2% |
| P/E to earnings growth (PEG) ratio | 1.1 |
HSBC shares currently trade on a modest forward valuation of 10.5, which strikes me as plain cheap, especially given the 5.3% prospective yield that’s on offer.
I believe HSBC offers excellent value to income investors, but there are a number of other valuation ratios you should consider before buying any banking shares.
