When you are trading on an earnings multiple of 35 for the current financial year, the market can be awfully unforgiving of even the slightest miss to forecasts.
Halfway earnings at Hargreaves Lansdown came in below consensus, and there was disappointment in some places on the dividend. The shares fell 32p to £12.85.
On earnings, analysts seem to have underestimated the damage done by a difficult stock market, as well as how much is being invested in the company’s next big project, HL Savings. This will arrive in the autumn and will allow borrowers to flit from bank to bank to take advantage of the best savings rate.
As for the markets, Hargreaves gets a double whammy when they are falling. Not only does investors’ interest, and therefore volumes, tail off, but fees are also performance-related, so fall. Profit before tax came in at £108.1 million in the half to the end of December, up 6 per cent; the company calculates that it would have been £114 million had the markets stayed flat.
As it was, the FTSE 100 fell 3.5 per cent during the period. It lost another 3.1 per cent in January, so another hit is coming unless it recovers significantly in the next few months. The suspicion is that some analysts had not factored in that half-year market fall into their expectations and hence the disappointment. On any other measure, the figures are good enough. Hargreaves has emerged from a couple of headwinds, an earlier fall in the interest made on clients’ money on account and a reduction in fees from the Retail Distribution Review. New business inflows, the number of active customers and assets under administration were all up.
The long-term trends are in its favour and, as the dominant player in the market with economies of scale, it is in the best position to benefit from them. The main one is the move towards pensions self-investment, a game-changer for the entire wealth management industry.
The shares have come back from above £15 late last year. That multiple, 34 times’ earnings, inevitably must give one pause for thought, but I have suggested before that for those prepared to take a long-term view, Hargreaves is a core investment.
Revenues £159m
Dividend 7.8p
67.9% Operating margin, down from 70.7%
MY ADVICE Buy long term
WHY Hargreaves is the clear market leader and as such will benefit from the move towards self-investment and other long-term trends
Shanks Group has made a good case that the issues affecting its disappointing trading statement are largely outside its control, but they have led to a sharp markdown in this year’s profits estimates for a company that has disappointed in the past. The main problem has been low commodities prices that have limited the amount the waste management specialist can get for recycled materials such as metals and plastics.
To this the company has added the low oil price, which means less work for its hazardous waste division. Shanks reckons that cost savings and productivity gains have offset about 60 per cent to 70 per cent of the total damage, but Investec, its house broker, has cut pre-tax profit estimates for the year to March 31 by almost 9 per cent to £21 million. The good news is that estimates for the next financial year are little changed. In an unrelated transaction, Shanks has sold its financial interest and half its stake in a Wakefield PFI contract for £30 million.
The shares, off 6¾p at 80¼p, sell on 16 times’ earnings. This is one of those cases where the market will need better news before affording Shanks the benefit of the doubt.
£30m from sale of Wakefield site
MY ADVICE Avoid for now
WHY Market may continue to have misgivings over Shanks
There must have been a degree of relief that Johnson Matthey’s third-quarter trading update did not contain a profit warning. As it was, the shares fell 21p to £24.07.
Its business is a highly cyclical one and is dependent on world manufacturing, supplying markets including chemicals, automotive and oil and gas.
The company has been reshuffling its portfolio in recent years, selling non-core businesses in chemicals and gold and silver refining. Strip these out and the third-quarter revenues are up by 3 per cent, although profits, unspecified, will be lower.
Half the group is involved in emission control technologies that go into the automotive industry. This is driven by vehicle production and by the rate at which existing cars and lorries fit its catalytic converters, itself driven by ever-tightening emissions legislation. This provides a degree of protection from those macro-economic trends, though there is no significant new legislation on the immediate horizon.
Its process technologies, which go into oil and gas and chemicals, and precious metals products have no such support and sales in both were down, precious metals being hit by the low price of platinum and palladium.
Those world manufacturing markets will remain challenging. Johnson Matthey has been cutting costs, which will boost profits by £30 million in due course.
The shares are well back from £35 last spring and sell on 14 times’ earnings. There seems no obvious reason for immediate progress.
3% rise in like-for-like sales
MY ADVICE Avoid for now
WHY Economic uncertainty will hold shares back
And finally...
Eagle Eye Solutions is an unusual company. It provides loyalty promotions digitally for businesses, such as Tesco and Sainsbury’s (Sir Terry Leahy, the former Tesco chief executive, is an early investor). It is impossible to value on an earnings multiple, with profits still a way off. A trading update yesterday missed revenue targets for this year and the shares were off 7 per cent. The key to future performance will be how many more clients it can sign up and yesterday there was another big one, Loblaws, a Canadian retailer.
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