Is Hargreaves Lansdown the most undervalued stock on the FTSE 100?

 Is Hargreaves Lansdown the most undervalued stock in the FTSE 100?

Hargreaves Lansdown is in danger of dropping out of the FTSE 100 as it is among the most undervalued stocks in the main index. Several FTSE 250 stocks are now worth more than the brokerage.

FTSE 100 shares have fallen significantly since the pandemic and the downward trajectory in recent months has reflected rising interest rates. However, they also represent a significant hurdle for brokers. So let's explore the size of this tailwind and whether Hargreaves could be the most undervalued stock on the FTSE 100.

Putting the evidence together

We don't have the full picture, but here are some key pieces of information. Firstly, in the first half of the year ended December 31st, we can see sales up 20% to £350m.This was driven by a 976% increase in cash holdings – cash held by Hargreaves Lansdown customers on the brokerage platform. This was possible because Hargreaves lends its customers cash deposits on the market.

Cash was actually Hargreaves' most profitable asset class during H1. It generated revenues of £121.6m and had a margin of 166 basis points. Cash assets under management were £14.5 billion at the end of the quarter. In the first half of 2023, however, it evidently increased significantly, from 3.5% to 5%. Therefore, we could expect cash returns to be even higher in the second half of the year.

A record year

Traditionally, most of Hargreaves' income comes in the form of fees on investor accounts and transactions. However, during worsening economic conditions, investor activity declined. Activity is likely to improve only when interest rates begin to fall and economic conditions improve.

Despite this, 2023 could be a record year for Hargreaves. Revenue generation is on track to beat every year to date, even the "extraordinary" year of 2021.We can also see that in the first half of the year pre-tax profit increased by a phenomenal 31%. Diluted EPS rose 29% to 33.1p. Clearly, there is no indication that costs are rising with revenue.

On the conservative estimate that this performance is flat in the second half of the year, Hargreaves could trade around 11.5, which does not make it the cheapest stock on the FTSE 100, although it is below average.

But to put that number in context, Hargreaves Lansdown's adjusted P/E ratio for the fiscal years ending June 2018 to 2022 averaged 29.4 times. We can also note that the firm is trading at a significant discount to its five-year average. It can be difficult to find this type of discount anywhere else in the index.

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In the dynamic world of stock investing, identifying undervalued stocks is like finding hidden gems in a treasure chest. Hargreaves Lansdown, a prominent player on the FTSE 100, has recently gained attention for its potential as an undervalued stock. In this article, we delve into the factors that suggest Hargreaves Lansdown could be an undervalued contender in the UK share market.

Understanding Undervalued Stocks

Undervalued stocks are stocks that are trading below their intrinsic value, offering investors an opportunity to acquire assets at a discounted price. Identifying such stocks requires careful analysis of fundamental metrics, industry trends and potential catalysts that could drive future growth. Hargreaves Lansdown's recent performance suggests he could be an interesting candidate to consider.

Hargreaves Lansdown market position

Hargreaves Lansdown is a well-established financial services company providing investment and wealth management services. Its consistent presence in the FTSE 100 demonstrates its importance in the market. However, recent market sentiment has led to some discrepancy between its market value and perceived intrinsic value.

Analysis of financial performance

A close examination of Hargreaves Lansdown's financial performance reveals several positive indicators such as revenue growth, earnings per share and return on equity have demonstrated resilience, underscoring the company's stability. Additionally, a historical analysis of the stock's price-to-earnings (P/E) ratio suggests that it could be trading at a discount to its industry peers.

Industry Outlook and Catalysts

The financial services industry is undergoing transformational changes driven by technological advances and changing consumer preferences. Hargreaves Lansdown's strong digital presence and commitment to innovation enable it to capitalize on these trends. As the industry continues to evolve, a company's forward-thinking approach can lead to expanded market share and increased profitability.

Investor sentiment and contrarian approach

Warren Buffett's famous saying, "Be fearful when others are greedy and greedy when others are fearful," underscores the value of contrarian investing. While market sentiment can be affected by short-term factors, a prudent investor looks beyond the noise. Hargreaves Lansdowne's recent underperformance could present a compelling contrarian opportunity for those willing to take a long-term view.

No investment is without risk and it is important to assess the potential downsides. Regulatory changes, an economic downturn and increased competition are just some of the factors that could affect Hargreaves Lansdown's growth trajectory. Before making any investment decision, it is essential to conduct a comprehensive risk analysis.

While the question of whether Hargreaves Lansdown is the most undervalued stock in the FTSE 100 is subjective, its recent performance and the underlying factors discussed here suggest that it could be an attractive opportunity for investors looking for undervalued assets. As always, investors should do their due diligence, consider their risk tolerance and consult with financial professionals before making any investment decision. In the dynamic world of investing, being informed and patient is the to making sound financial decisions. This article is for informational purposes only and does not constitute financial advice. The author is not a financial advisor and readers are advised to seek professional advice before making an investment decision.