International Consolidated Airlines Group (LSE:IAG) and Hargreaves Lansdown (LSE:HL) have been two of the worst FTSE 100 shares over the last five years. But is a recovery on the cards?
Both businesses have faced significant headwinds. But I think that one is a significantly better investment than the other at today’s prices.
IAG: staying grounded
IAG shares have struggled since 2018, mostly due to the Covid-19 pandemic. But with travel restrictions now in the rear view mirror, how do the company’s prospects look going forward?
As I see it, the outlook isn’t that great. The business is still going to have to contend with some serious issues as a result of the pandemic even if the event itself is over.
The biggest of these is debt. Since 2018, the company’s debt has increased from just under £1.5bn to around £10bn.
Spiralling debt was what caused Warren Buffett to sell his stake in the US airlines at the start of the pandemic. And I think the situation looks like a real problem for IAG.
The debt will have to be repaid eventually, either through earnings or through shareholder dilution. And with interest payments taking up 72% of its operating income, I doubt it’s going to be earnings.
Falling interest rates might give IAG a chance to refinance at low rates and deal with the problem. If that happens, the stock and the business could do better than I’m expecting.
I don’t see this as likely, though. I think it’s more probable that rising interest rates cause problems both for the company’s balance sheet in terms of debt and for revenues in terms of a recession.
The stock is up 18% since the start of the year. But I think there are more issues coming for the business, so I’m staying well away.
Hargreaves Lansdown: watching with interest
Unlike IAG, Hargreaves Lansdown has a pretty good balance sheet. The issue it has had has been with competitors undercutting its business model.
Traditionally, the business has made money by charging platform fees and commissions. The emergence of brokers with zero fees has caused this revenue to fall.
As a result, HL’s net income has grown at around 1% per year over the last five years. That’s caused the stock to fall by around 52%.
As I see it, though, the company is responding well to this challenge. Rather than relying on fees, the business has started generating revenue by earning interest on customer deposits.
The amount generated by this has jumped from £12m during the second half of 2021 to £125m in the last six months of 2022. I think this marks a significant shift for the business.
Relying on fee income was likely to prove unsustainable for Hargreaves Lansdown in a low-fee world. But another source of income limits the company’s dependence on fees.
For me, there’s still too much risk here – £125m in net interest income doesn’t justify a £3.8bn market cap. But I wouldn’t be at all surprised to see the stock make a recovery from here.
