For any share price to double in value, there must be scope for it do so from a valuation perspective and also in terms of potential catalysts to boost investor sentiment. In the case of HSBC (LSE: HSBA), it seems to have both of these key criteria and could therefore double over the medium-to-long term.
For example, HSBC currently trades on a price-to-earnings (P/E) ratio of just 10.3. Were its shares to double in value, they would have a rating of 20.6 and while this may seem to be rather high, such a valuation may not be necessary if HSBC is able to increase its bottom line at a rapid rate. And with the changes it’s making and the opportunities for growth, this appears to be very much on the cards.
In fact, HSBC remains extremely well-positioned to benefit from the rapidly rising wealth among the middle class of China. Although financial product penetration in China is relatively low at the present time, this is set to change very quickly over the next decade and products such as pensions, insurance and investment-related offerings are likely to become increasingly popular. With HSBC having a very large presence in the country and offering a wide range of products and services, it seems to be well-placed to tap into such growth.
Investor sentiment
Furthermore, HSBC appears to be at the start of a journey of self-improvement that has the potential to not only deliver rising profitability, but to also improve investor sentiment. For example, HSBC is cutting thousands of jobs in a major drive that seeks to reduce its costs after they recently hit a record high. This should bring the bank’s cost-to-income ratio down and thereby make it a more efficient entity. Not only would this be good for profitability and mean that a P/E ratio of 20.6 may not be necessary for HSBC’s share price to double, it could boost investor sentiment significantly.
Were HSBC’s share price to double from its current level, it would still yield an impressive 4%. That’s the same yield as the FTSE 100 and shows there’s not only clear scope for HSBC’s share price to double, but also that its yield could prove to be a catalyst to push its share price higher. After all, with interest rates likely to remain low over the medium term, a yield of just over 8% is not only rare, but also very enticing to income-seeking investors.
And while HSBC’s dividend may not grow rapidly in the next couple of years as it seeks to improve its business model, with its bottom line due to grow by 7% next year, HSBC appears to be well-placed to still grow dividends in real-terms in 2016 and beyond.
Clearly, suggesting that HSBC’s share price will double within a year would be rather optimistic. After all, Chinese growth potential and the bank’s strategy will take time to have an impact. However, with such a high yield HSBC should prove to be a strong performer over the next year while its long term future remains very bright.