Hargreaves Lansdown: Contrarian Buy Or A Fallen Star?

8th May by Roland Head

9 comments 1976 reads

Leading retail investor platform Hargreaves Lansdown (LON:HL.) has seen its growth slow in recent years, as a raft of newer and cheaper competitors have entered the market.

Relatively high prices and a lingering association with the Neil Woodford scandal may also be hindering sentiment towards the business.

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However, while Hargreaves undoubtedly faces some near-term challenges, trading appears to be stabilising. April’s third-quarter trading update was good enough to trigger a round of broker upgrades.

Hargreaves’ historic DNA is as a low-cost innovator. Today the company is a hugely profitable market leader. If CEO Dan Olley can combine these strengths to rejuvenate the business, I believe the shares could be cheap on a medium-term view.

In the meantime, I think Hargreaves £500m net cash balance and well-supported 5.7% dividend yield should help to underpin the stock’s valuation.

Summary

Pros:

Market leader with near-40% share
Very strong profitability and good cash generation
Modest valuation if business can return to earnings growth

Cons:

May need to cut prices to become more competitive
Ongoing legal action relating to Woodford affair
Highly competitive marketplace, can HL attract new generations of investor?

Profile

About the stock

Hargreaves Lansdown is an investment platform serving the direct-to-consumer market. It’s classified in the Financials sector, within the Investment Banking & Investment Services industry group.

Hargreaves’ floated on the London market in 2007 and is currently a member of the FTSE 250, with a market cap of £3.9bn and a recent share price of 825p.

The StockRanks show a high quality score for Hargreaves Lansdown, but fairly average scores for value and momentum.

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The stock’s overall style rating is Neutral. This suggests that while the business has some good qualities, it may be less likely to outperform in the near term than some higher-ranked companies.

About the opportunity

Hargreaves Lansdown is the market-leading DIY investment platform in the UK, with a market share of around 40%.

The company delivered an almost unbroken run of profit growth from its flotation in 2007 through to 2020. Profits then fell sharply through 2021 and 2022…

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Silverback01

8th May

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Thank you, Roland, for your insights on Hargreaves Lansdown. You've rightly pointed out a key issue, that despite being a market leader, they no longer offer the lowest prices or the most innovative features, which I believe could be critical in attracting a price-sensitive, tech-savvy audience. This suggests that their historical competitive advantages, such as strong brand recognition and customer loyalty, may not suffice in the long term. To maintain their market position, Hargreaves Lansdown could very much benefit from reassessing their pricing structure and enhancing platform functionalities to meet changing investor expectations. For instance, I haven't made significant investments in my portfolio with them for years, and their accounts team has yet to take notice, which speaks volumes about their client engagement (other platforms have benefitted as a result). I think that ultimately, Hargreaves Lansdown's ability to adapt to market changes, especially in pricing and technology, will be crucial for sustaining their competitive edge in a crowded and evolving marketplace.

prophetwarning

Thank you for such a comprehensive piece of analysis.

Coops

I enjoyed the analysis and agree the thrust of it. If they are x growth and not attracting next generation investors it will take time to register in the valuation and at this stage not immediately apparent. Existing customer base is sticky and supports the valuation. Cost base control should be better from the market leader but the foray into advisory services ill judged. Sticking to the knitting and being more adept at winning new long term younger customers the answer.

roddy10

(1) I think it would be reasonable to make an estimate of potential litigation costs / regulatory and legal fees / compensation related to the Woodford affair. I suspect the circa £536M cash pile has not gone unnoticed by regulators and lawyers.

(2) I think the behaviour during the first phase of rising rates ie holding onto the windfall and not passing it through was reprehensible - and I am not convinced it fulfils their obligations of acting fairly w.r.t customers......I wonder if any lawyers have considered this and whether it matches the wider FCA obligations of acting fairly to customers (did I mention they have a cashpile of £536M?) [See slide 11 of this re Dear CEO letter - note that HL compares themselves to 'platforms' but that will include a lot of IFA platforms that have a different model to a low-cost stockbroker -https://www.hl.co.uk/__data/as... - in case link does not work I was referring to slide 11 of 2024 interim results presentation dated 22 Feb 2024]

(3) The interface and user experience is a tad clunky, unwieldy and underinvested. There were quirks which were a tad weird over Covid - eg they temporarily stopped their bed and isa service - surely that should have been fully automated this number of years after ISAs started?

(4) You mention your dividend expectations and I think this gets to the nub of the matter. This is a company where investors and management have focussed more on the reliability, regularity and growth of dividends rather than investing for future business. Notwithstanding that I am shocked by the overhaul costs (think there was a proposal to spend £175M on IT by previous mgmt) - especially those proposed by previous management and I suspect the cash pile might have had something to do with their largesse (did I mention the cashpile of £536M).

(5) I think the risk for Hargreaves is that market share loss will be slowly at first and then a lot all at once.

(6) The previous chair (Deanna Oppenheimer) left as well as the CEO. I think this is worthy of note.

(7) Three of the current board - John Troiano, Michael Morley and Adrian Collins have wealth management / fund management experience. I think that is an upgrade - as I have felt the company had been losing its way. Nonetheless, I think that a lot of HL's weakness is due to a lack of understanding of the plumbing of financial markets and what customers want, right from the top - I am still to be convinced that the present CEO ('seasoned technology leader and has a track record of driving digital transformation in established businesses'.....'brings problem solving and analytical skillset' - all from https://www.hl.co.uk/about-us/... ) is the right leader. The chair also does not appear to have relevant vertical domain experience.

(8) Abrdn bought Interactive Investor at frankly an overinflated price. In order to 'justify' the acquisition, I think it is reasonable to anticipate that Abrdn will be pumping in advertising spend and so the marketing / advertising intensity in this market will increase - that would, I anticipate, increase the cost of acquisition and cost of retention of new customers for HL.

(9) The 'belief' is that new management has reined in the spend. Slide 12 of the interim results presentation 2024 however mentions 'strategic investment spend' of '£175m + £50m'...hmmmm... and if you look at a lot of the boxes on the page one could easily forget this is an investment platform / stockbroker. (Also slide 30).

(10) Slide 18 in the above is interesting as asset retention is 90.4% (vs 92.2% client retention) - this goes back to my point earlier that market share is lost slowly at first....

(11) Some of the management slides are from the school of Vernon Hill (eg slide 21 'Delight clients, drive growth').

(12) Overall I think the key to valuing HL is:

(a) has it been overearning due to covid / interest rate spread? What is the true underlying profitability in a normalised environment going forward?

(b) has the competitive intensity increased with the involvement of Abrdn in the sector?

(c) is the leadership focussed on the right things - or developing a zoo of technology acronyms which are not going to solve the underlying issues for customers? (eg no mention of a tool to match stockopedia?)

(d) what do I need to deduct as a contingency for litigation / fines etc?

(e) in a recessionary environment how much of the cash stashed away in HL (eg in the cash ISAs / multi-bank cash isa) going to be withdrawn?

Notwithstanding that a lot of my family's investments are held at HL - but I was recently looking at the costs / expenses and have a note for myself to consider moving over the summer to someone else - probably AJ Bell.

Incidentally anyone looking at the FCA attitude to cash in accounts ought to read page 28 of the 2023.12.07 FY23 results presentation from AJ Bell - https://www.ajbell.co.uk/group...

Roland Head

Hi Roddy,

Thanks for your in-depth comments. I agree that risks remain at Hargreaves Lansdown (LON:HL.) and spending plans are still substantial under the newish CEO.

I have to admit that although I've used several of the big platforms, I haven't used HL, so I can't comment on the interface. But my view broadly is that it makes sense for Hargreaves to invest in updating its technology, not least because this could help recruit new generations of customer.

The market is still shaking out and adjusting to higher interest rates and tougher competition, in my view.

I'd argue that history suggests many newer upstarts will come to nothing, while a few will thrive. Meanwhile, incumbents with strong market share start off with a strong hand. If HL loses all of its advantages, it will probably be due to mismanagement, in my view.

With Hargreaves and Lansdown still controlling a substantial shareholding, I would hope that isn't going to happen. But it could do...

Regards,

Roland

Boros10

10th May

Excellent analysis and fair coverage of both HL’s strengths and weaknesses. Roddy10 comments remind us why there continues to be significant short interest in the stock. Nonetheless, its strong financials and dominant market position afford it time and space to reinvent itself. If its management team is not up to this task then a takeover by one of the big US players might be on the cards. I too remain concerned about the CEO’s inexperience and ability although not his authenticity and the new non-exec Chair’s poor business track record.

The business was starved of net interest margin during the period of ultra low interest rates stemming from the 2008 financial crises. Whilst it may not be able to maintain the eye catching £268.7m contribution from net interest margin (up from just £50m in FY22) for the reasons discussed in the article and comments section it is very likely to see the contribution from net interest margin significantly higher than in the previous 14 years, and if the cash finds its way back into the market then higher broking and platform fees will likely compensate.

It’s undeniable that AJ Bell is growing more rapidly and has a more experienced and entrepreneurial management team than HL but this is in part reflected in its much higher rating. Although Hargreaves Lansdown has been a profitable investment for me since getting involved last autumn there might now be a case for now running with two horses rather than just one.

Rusty2

12th May

Hargreaves Lansdown (LON:HL.) are giving back up to £100 trading fees until 21st June. However they did not tell me until l had done a trade. It started 1st May. If l have not done any trades before 21st June, l probably would not have known about it. Spoke to someone else who uses HL and he did not know about it either. Seems HL are under some pressure to keep their clients sweet. I'm still moving most of my ISAs to other platforms.

I will do a separate topic about it also.

Hargreaves Lansdown: contrarian buy or a fallen star?

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Roland Head

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