When I last covered Hargreaves Lansdown (LSE: HL) shares in late October, I said that the stock wasn’t a ‘buy’ for me just yet, despite the fact that I thought the long-term story was attractive. My concern was that there was downside risk due to the role the company played in the Woodford Equity Income debacle.
Last week, however, when the shares tanked 8% on Friday’s half-year results, I couldn’t resist adding a few more shares to my position in the FTSE 100 company. Here’s a look at why I just topped up my holding.
Woodford impact
Having monitored HL shares closely over the last few months, my current view in relation to the potential impact of the Woodford debacle is that it’s most likely priced into the valuation. I could be wrong, but I think the shares are likely to recover as people move on from the scandal.
Reading Friday’s half-year report, it doesn’t sound like the company is too concerned about the long-term impact of the Woodford drama. For example, CEO Chris Hill said: “We are confident that the diversified nature of Hargreaves Lansdown, our continued investment where we see opportunity and market-leading client offering, mean that we are well placed to help our clients prosper, whilst delivering strong and sustainable returns for shareholders.”
The company also said that it’s “excited” by the structural growth opportunity in the UK savings and investments market and that it remains confident in its ability to deliver sustainable growth through the cycle.
Solid results
While the market clearly didn’t like Friday’s results, I thought they were pretty solid given the challenging backdrop last year (trade wars, UK general election, Brexit uncertainty, Woodford). Revenue for the period was up 9% while diluted earnings per share increased by 12%. Active clients jumped 50,000 to 1,274,000.
It’s also worth noting that the group increased its interim dividend by a healthy 9% (versus a 2% rise last year). This is another signal that management is confident about the future.
All things considered, I thought the share price fall of 8% on Friday was excessive, so I went against the herd and topped up my holding. I paid around 1,750p per share, which equates to a forward-looking P/E of about 30 (falling to 27 using next year’s consensus forecast). A high valuation, no doubt, but the company is worth a premium in my view, as it’s extremely profitable.
Risks
Of course, there are risks to the investment case here.
One major risk is the threat of low-cost competition. In the US, there are now many online brokers that offer commission-free (or very low cost) stock trading, and these kinds of companies are beginning to arrive in the UK. I think at some stage Hargreaves will have to reduce some of its fees to remain competitive and this is likely to hit profit margins.
Another risk is that the Woodford affair has a long-lasting impact on the group’s reputation.
Overall, however, I’m bullish on the long-term outlook for Hargreaves Lansdown. While the stock is a little out of favour, I’m a buyer.
