GuruFocus’ Buffett-Munger Screener is a great tool for finding good companies at fair or undervalued prices.
One stock I think is interesting that came up on the screen is Hargreaves Lansdown PLC (LSE:HL., Financial), which operates a large direct-to-investor investment service in the United Kingdom built around offerings tailored to client needs.
In the U.K.'s lockdown and work-from-home environment, many people have had time to do those boring life tasks they keep putting off. This included getting finances in order and investing the extra disposable income and savings that built up while entertainment and social activities were off limits. Hargreaves cashed in. It saw 8.7 billion pounds ($12.03 billion) in net new inflows last year. This was the first time inflows were over the 8 billion pounds level in a single financial year. This pushed assets under administration up by nearly a third.
This strong performance also increased market expectations, so when the 8% increase in adjusted operating profits for the last financial year didn’t meet analysts' consensus forecasts, the stock sold off.
Unbelievably, Hargreaves’ shares are just over 20% lower than they were at the start of 2020. A reason for this is because a peer and recent initial public offering, AJ Bell PLC (LSE:AJB, Financial), has become the darling in this sector as the company generally offers a less comprehensive but cheaper set of products and services to customers. Since many first-time customers were younger, cost-conscious investors with less disposable income, AJ Bell has captured this growth market well. This is reflected in market growth expectations: AJ Bell trades at around 37 times forward price-earnings, while Hargreaves’ forward price-earnings ratio is at around 27.
However, Hargreaves is still the overall market leader in the U.K. for investment platforms and has a high customer retention rate of more than 90%. The cost base is largely fixed, so the company has good operational gearing.
Operating costs rose 24% last year as the group invested in improving technology and services to attract more customers.
However, one of the reasons Hargreaves appeared on GuruFocus’ Buffett-Munger Screener is because it scores 5 stars for predictability. That’s because the online investment and robo-wealth markets are cash cows. With low interest rates set to stay with us for a long time, the alternative of parking your money in your bank account is less than attractive.
Hargreaves’ fees and annual charges are more expensive than lots of its peers, but its services are more comprehensive. The commission-free trading apps tend to have poor customer service and don’t offer corporate actions services like proxy voting. Most peers don’t offer the wide range of products that Hargreaves does.
It also appears that because Hargreaves has not yet had to make wide cuts to fees or charges, it is not really feeling competition from low-cost upstarts. That’s probably because the offering from Hargreaves is quite differentiated to the commodity-like execution-only, low-cost platforms. People with wealth are prepared to pay a little more to manage it with greater sophistication. That’s probably why Hargreaves is still increasing market share.
There are also potential risks to owning Hargreaves. Legal firm RGL Management claims the company failed to warn customers of concerns over the Woodford Equity Income Fund, which collapsed. But investment is a game where caveat emptor should apply. I’m not sure Hargreaves is responsible for possible poor investment decisions of its clients.
At just under $10 billion market capitalization, Hargreaves is an ideal takeover target for cost-stripping private equity or financial services firms looking for a relatively asset-light way to diversify revenue streams. Hargreaves Lansdown has spent decades building up its brand, which wouldn’t be reflected in its book value, so any buyout would need to be at a significant premium. Mr. Market’s emotions appear to be focused on the glamour stocks in this sector and Hargreaves’s board would not allow the company to be bought on the cheap.
As a financial services company, Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) understands this market. Could it be a bidder for Hargreaves Lansdown? The Buffett-Munger Screener suggests this isn’t impossible. I think it is possible too, so the stock is definitely on my watch list.
