In this article I am looking at why HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) is a fantastic value pick at current price levels.
Snap up a banking bargain
Global banking goliath HSBC Holdings has been the victim of slowing investment bank activity in recent times, as fears of slowing economic growth have significantly crimped performance. Despite these travails, however, City analysts expect the business to keep earnings ticking higher, leaving HSBC dealing what I consider terrific value on a prospective P/E multiple of 11.5.
This figure compares extremely favourably with a forward average of 14.5 for the complete banking sector, while it also outstrips a corresponding readout of 17.5 for the FTSE 100. Considering that the majority of HSBC’s banking peers boast negligible exposure to lucrative Asian markets compared with that of their big-cap rival, I believe that HSBC is a snip at the present time.
HSBC announced during this month’s interims that pre-tax profit plummeted 20% during January-March, to $6.8bn, with underlying revenues slipping 8% during the period to $15.7m.
Chief executive Stuart Gulliver noted that
‘in our principal Retail Banking and Wealth Management business, revenues were impacted by changes in incentive plans and product pricing,’
more than offsetting turnover growth in its Commercial Banking division. But catastrophically, performance at its Global Banking and Markets investment arm tanked during the period, and revenues here slumped 11% to $5.2bn.
However, HSBC’s drive to create a more streamlined and earnings-efficient proposition by shedding non-core businesses can explain the downturn in group revenues to a huge extent — excluding the impact of asset sales, group turnover slipped just 2% year-on-year.
And although fears over a macroeconomic slowdown has affected business at its investment banking division, I believe that signs of improvements in the global economy should drive revenues here higher again.
Following this year’s anticipated 9% earnings advance, brokers have pencilled in a 10% increase for 2015, a figure which pushes HSBC’s P/E multiple to 10.4, peeking just above the bargain benchmark of 10 times prospective earnings or below.
With significant restructuring helping to create more efficient earnings-generating machine in the long term — operating costs slid 2% to $8.8bn during January-March — and heavy exposure to the high-growth regions of Asia, I believe that HSBC is a fantastic stock pick for those seeking long term earnings growth.