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Think Hargreaves Lansdown’s share price is a bargain? Read this now

Hargreaves Lansdown (LSE: HL) is one of the UK financial sector’s greatest success stories of the past decade. The company has grown from a two-man operation into one of the largest financial institutions in the UK, managing tens of billions of pounds for UK investors.

Its growth has been unstoppable. Investors have been well rewarded and more than happy to pay a premium for shares in the business. 

However, at the end of September, its expansion hit a stumbling block. In a trading update management told the market just £1.3bn of net new business had arrived in the three months to the end of September, a 13% decline year-on-year. The update also warned that market uncertainty and “weak” investor sentiment has caused an industry-wide slowdown, which seems to suggest that the company could issue further bleak updates in the months ahead.

With growth slowing, investors have been quick to turn their backs on the company. The stock has slumped nearly 20% in the three weeks since the news broke.

Such a decline is bound to attract bargain hunters, but I’m not convinced that the stock offers value today.

Not cheap enough 

The biggest the sticking point for me is Hargreaves Lansdown’s current valuation. Even after losing nearly a fifth of its value, the stock is still changing hands for 32 times estimated 2019 earnings. This premium valuation leaves little room for further disappointment. With investors placing such a high premium on growth, it is no surprise that the stock has reacted so negatively to slowing inflows.

In comparison, the London Stock Exchange (LSE: LSE), which operates the plumbing for some of Europe’s most important financial markets, is valued at a more modest 21.5 times forward earnings. I reckon this is a much more acceptable valuation and one that’s less likely to result in a sudden loss of value if the company fails to live up to expectations.

A better buy 

The key difference between the LSE and Hargreaves Landsdown is that the latter has to rely on its own brand value to attract customers. Meanwhile, the former does not necessarily have to impress its customers. Financial markets will always be a critical part of the global economy. As the LSE operates some of the biggest markets in Europe, it should have no problem generating a steady revenue for many years to come. 

And unlike Hargreaves Landsdown, which generally reports a slowdown when markets are volatile as investors take to the sidelines, volatility is excellent news for the LSE as it means more trading. More trading means more commissions for the firm.

With this being the case, I’m much more excited about the long-term prospects for the LSE than Hargreaves Lansdown as it is positioned to succeed in all market environments. The LSE also has a better record of dividend growth. Over the past five years, the group has increased its distribution to investors at a compound annual rate of approximately 15%, compared to 9% for Hargreaves Lansdown. 

Even though the LSE’s yield is currently only 1.6% compared to its peer’s yield of 2.6%, the higher rate of growth indicates to me that this is a better long term income play.

So overall, if you were thinking about buying Hargreaves Lansdown after recent declines, I’d take a look at the LSE first. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.