Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at HSBC (LSE: HSBA) (NYSE: HSBC.US) to ascertain if its share price can return to 1,067p.
Initial catalyst
As usual, before we can establish whether or not HSBC can return to its all-time high, we need to figure out what caused the bank’s share price to reach 1,067p in the first place.
HSBC hit its peak during the first few months of 2001, when the internet bubble was in full swing. Unfortunately, this meant that HSBC was swept along in the euphoria and the banks share price surged to 1,067p, before crashing back down to 600p only seven months later.
What’s more, at a price of 1,067p, HSBC was trading at a historic P/E of around 26, which seems high for a bank.
But can HSBC return to its former glory?
Looking through HSBC’s numbers, it might seem as if the company has all the foundations in place to make another run at 1,067p. But there is one thing that concerns me.
You see, while HSBC has nearly tripled its gross profit since 2000 and increased shareholders’ funds nearly ten-fold, the bank has also more than doubled its number of shares outstanding. As a result, per share metrics have been distorted.
In particular, while HSBC’s profit attributable to shareholders has risen 160% during the last 13 years — from $5.4 billion, to $15.3 billion — over the same period the company’s earnings per share have only expanded a minuscule 14%.
This indicates to me that HSBC is going to have to work extra hard to generate a level of profit that would support a higher share price.
In addition, during the past five years HSBC’s earnings have been somewhat unstable, both falling and rising. So, it’s unlikely that investors will again place a growth premium on the company any time soon.
Having said all of that, if HSBC’s recent plan to spin-off its UK highstreet banking division goes ahead, the bank will find it even harder to return to 1,067p.
Foolish summary
All in all, HSBC is a bigger and stronger bank than it was during 2000. Nevertheless, an uncertain regulatory environment and erratic profits mean that investors are unlikely to place a growth premium on HSBC’s shares anytime soon.
So overall, I feel that HSBC cannot return to 1,067p.
