Investment View: Hargreaves still a star, but expect a pause for breath
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Tuesday 23 April 2013
Our view: hold
Price: 951p (-9.5p)
Hargreaves Lansdown has been one of this column's star tips. Despite a valuation of over 20 times earnings with the shares at 508.5p in April, I said buy. Since then they have nearly doubled.
Here's why they can continue to climb. HL has become the Tesco of financial services, meaning Tesco in the days when Sir Terry Leahy was running the show and the group was gobbling up retail space and customers' pounds. That combined with a bit of B&Q.
HL offers an investment superstore, with a "one-stop shop" for a huge range of products for "do it yourself" investors. To sweeten the deal, it also provides research and ratings, and it now administers billions. More is still pouring in – during the three months to 31 March, £1.8bn was invested through HL, a quarterly record. Year-to-date revenues rose by nearly a quarter.
The company found itself in the middle of a sweet spot for two reasons: equity markets have been rising at a time when, if you hold your savings in cash, it will get eaten away by inflation because of near-zero interest rates. And with bonds also a waste of time, shares are an increasingly attractive option.
So is DIY investing, with financial advisers now forced to agree fees upfront with clients rather than being remunerated through commissions. Consumers have never much liked the idea of shelling out £200 an hour to a financial adviser, which is why the commission system was so popular.
Regulatory changes to the way financial products are sold will affect platforms like HL down the line. It could squeeze margins, which the company has anyway indicated are likely to come down.
The other risk on the horizon is a correction in stock markets. Retail investors tend to run when this happens, and HL relies upon retail investors. That said, the shares' performance speaks for itself. The problem is the price is now looking very rich. HL trades on 31 times forecast earnings, with a prospective yield of 2.9 per cent. The company certainly deserves to be on a premium, and its growth up to now and forecast for the future, have been stellar, fully justifying one.
However, I wouldn't be at all surprised if the shares pause for breath for a while. So it's just hold for now. But buy more if the shares show any sign of weakness.
A more conventional retailer, Debenhams, I want to update on after its recent trading statement. I said avoid with the shares at 105p in the middle of January, but indicated that they might be worth a look were they to show weakness.
It hasn't been happy days at the company, and they have been very weak since. But maybe it's time to firm that view up.
Last week's trading statement suggested results will be in line with reduced guidance. Like-for-like sales growth of 3.1 per cent was creditable in the current climate and taking into account the recent cold weather.
What was interesting was that management said online sales were "more profitable" than in-store sales. Investec came up with an interesting take on this. Its analysts said: "At a marginal cost basis, an online sale is more profitable versus the average cost basis profitability of an in-store sale (due to high store fixed costs).
"But on a marginal cost basis, an in-store sale is more profitable than online. Thus, while good that online sales are marginally profitable, when sales are merely transferred from stores to online, instead of being incremental sales, the business will continue to face margin dilution."
This issue is not unique to Debenhams. To win in this environment you need to drive incremental sales online as opposed to transfers from your shops because you're just cannibalising yourself and will lose out on profitability.
But Debenhams can do this. It has a relatively small store portfolio and simply needs to draw sales away from rivals to get its online offering working very nicely.
Debs still needs to build up trust with investors. Accounting quirks complicate forecasts. But at the current price the shares are worth a speculative buy, although I'd be inclined to trade out and book a quick profit if they show some momentum.
On 8.7 times this year's earnings (the year ends on 31 August) falling to 8.2 times, with a 4 per cent forecast yield, they look cheap.
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