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Why Hargreaves Lansdown PLC Remains A ‘Buy’ Despite Peter Hargreaves’ Shock Exit

Financial services play Hargreaves Lansdown (LSE: HL) shocked the market in Tuesday trade by announcing the imminent departure of founder Peter Hargreaves from the board. The market reacted with expected pessimism and the business was recently dealing 2.2% lower in Tuesday business, although recovering ground after a near-5% plunge immediately following the news.

The company stated that Hargreaves will still remain with the firm, and the former executive commented:

I will continue to work in the business, but will spend more time with my family and pursuing outside interests. I will, of course, remain in close touch as a major shareholder.”

Hargreaves holds a 32% stake in the company he formed back in 1981 with Stephen Lansdown. But with his departure leaving the boardroom bereft of both founders — Lansdown handed the keys to the executive washroom back in 2012 — and following on from chief financial officer Tracey Taylor’s resignation late last year, questions are understandably doing the rounds over what prompted today’s news, and indeed what the future direction of the company will look like.

‘Annus horribilis’ a one-off?

Hargreaves Lansdown disappointed the market in February’s half-year update, revealing that pre-tax profit slipped 2% during July-December — to £101.9m — as lower interest rates, combined with the effect of fee reductions at its Vantage fund platform, ate into the bottom line.

Still, the City remains bullish over the fund managers’ earnings outlook in the longer term. Although Barclays Capital commented that although reduced fees from Vantage will create tough comparables for revenues and earnings growth this year, and cash yields under pressure, the broker noted:

(F)or 2016 we believe these two headwinds should start to wash through and in terms of competitive positioning we believe there are grounds for more optimism. Flows and customer numbers are recovering quarter-on-quarter and asset retention ratios have stabilised.”

Earnings primed to ignite

And the City is in broad agreement that Hargreaves Lansdown is poised to bounce back from next year, with an expected 1% earnings uptick for the year concluding June 2015 expected to be followed with a meatier 19% advance in the following 12 months.

These figures do not create lip-smacking value, however, with Hargreaves Lansdown changing hands on P/E multiples of 35 times and 30.5 times prospective earnings for 2015 and 2016 correspondingly. Still, I believe the financial services specialist’s market-leading proposition merits this premium, particularly as an improving economy and government drive to get people to save more should enhance client activity in the coming years.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.