After a strong run between February and May, Hargreaves Lansdown (LSE: HL) shares plummeted in June on the back of the suspension of the Woodford Equity Income fund. Trading near 2,450p in mid-May, the FTSE 100 stock fell as low as 1,829p on 10 June, representing a decline of around 25%.
So, what’s the best move now? Has the share price dip provided a buying opportunity, or is Hargreaves a stock to avoid?
Near-term earnings
To my mind, there are two main issues to consider in relation to the Woodford fund suspension. The first is near-term revenue and earnings. Will they be affected?
When news of the Woodford suspension broke, Hargreaves announced it would be dropping the 0.45% per year platform fee on customers’ holdings in the fund while it was suspended.
Hargreaves’ clients had around £1.4bn invested in the Woodford Equity Income fund at the end of last year, according to Citywire (it’s likely to be less than that today given withdrawals this year but I’ll stick with that figure for now), which means Hargreaves is set to lose around £525,000 in fees per month as a result of the suspension.
Is that material? If the suspension is lifted soon, probably not, as the group is forecast to generate revenue of £485m for the year ended 30 June. However, if the suspension was to drag on for six months or longer, the lack of revenue could certainly add up.
Reputation hit
The other major issue to consider is the company’s reputation. Despite the shocking performance of the Woodford Equity Income fund, Hargreaves continued to include it on its best-buy list. That certainly raises questions about conflicts of interest and could impact clients’ trust in the group. Could this result in customers leaving Hargreaves and going to other platforms such as AJ Bell or Interactive Investor? It’s possible – we will have to wait and see.
Broker upgrade
Interestingly, analysts at Deutsche Bank stated last week that “the pain” from the Neil Woodford debacle is now built into the share price. Upgrading the stock from ‘sell’ to ‘hold’, Deutsche analysts said: “Though clearly a negative for Hargreaves in terms of reputation, our analysis of the risks nonetheless suggests that the fallout from Woodford is now well reflected in the recent share price decline.” That said, the broker’s price target is 1,775p, which is around 8% lower than the current share price.
What I’d do now
Personally, I think it’s possible we could see further share price volatility in the near term while the Woodford scandal is still in the news. For this reason, I’d hold off on buying the stock right now. At the moment, the shares trade on a P/E ratio of around 32 which doesn’t leave a big margin of safety.
Having said that, if Hargreaves’ share price was to come down to the 1,600p-1,700p mark, I’d certainly be more interested. That would bring the P/E ratio down to the high 20s.
I’ll point out, however, that I do still really like the long-term story here and that’s why I own the stock myself. Britons desperately need to save and invest more for retirement and I think Hargreaves, with its brilliant investment platform and excellent customer service, looks well-placed to benefit.
