How HSBC Holdings plc Could Be Worth 675p!

A rise in HSBC’s (LSE: HSBA) share price of 53% may sound like a relatively unlikely prospect. After all, most FTSE 100 shares offer much more limited capital gain potential than that and with HSBC being among the largest stocks on the FTSE 100, the phrase ‘elephants don’t gallop’ may seem rather appropriate.

Furthermore, many investors would argue that HSBC is facing too many problems at the present time to rise by 53%. For example, it’s being penalised by the market for having a large exposure to China, where economic growth is slowing faster than many commentators predicted. In addition, it has become inefficient compared to a number of its rivals and is experiencing the twin problems of stale revenue growth and record operating expenses.

As such, the market seems to be rather unimpressed by HSBC’s future and a share price gain of 53% may seem like an overly optimistic forecast.

Growing appeal

However, delving a little deeper into HSBC’s valuation and its long-term prospects highlights just how much potential the bank has when it comes to capital gains. In fact, a 53% gain may be somewhat conservative when you consider that the global banking giant currently yields a whopping 7.6%. That’s almost twice as much as an already high-yielding FTSE 100 and means that if HSBC were to trade at 675p, it would still yield a highly attractive 5%. With interest rates set to stay low for longer than was previously expected, such a high yield could become increasingly appealing over the medium term.

Clearly, a high yield means little if the chance of dividends being paid is slim. Certainly, HSBC has its woes, but its dividend is forecast to be covered 1.5 times in 2016. This provides it with a very generous amount of headroom so that even if the outlook for China and the rest of the global economy deteriorates, HSBC is still likely to be able to make shareholder payouts without too much difficulty.

Additionally, HSBC seems to have the right strategy through which to get to grips with its spiralling costs. It’s making thousands of redundancies and is seeking to make major efficiencies in the coming years, which should help it compete better with smaller rivals. This could act as a positive catalyst on investor sentiment and with HSBC trading on a price-to-earnings (P/E) ratio of just 8.8, there’s scope for a much higher share price.

In fact, if HSBC were to trade at a share price of 675p, it would equate to a P/E ratio of 13.4. For one of the world’s biggest banks, which has exposure to an economy that’s set to become much more consumer-focused in future years, this seems to still be a very enticing price to pay. As such, and while 675p may seem like a rather distant price level, HSBC’s low valuation, sound strategy and favourable geographic exposure mean that gains of 53% or more are very much on the cards.

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Peter Stephens owns shares of HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.