By:
Cathy Gong, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• HSBC Holdings plc. (NYSE:HSBC) is a British multinational banking
and financial services holding company that operates in Europe, Asia, North
America, North Africa, and the Middle East, and is one of the world’s largest
banking and financial services organizations.
• Founded in 1865 to
finance trade between Asia and the West in Hong Kong, the firm is headquartered
in London. 45.2% of their revenue came from the Asia Pacific region in 2016. The
firm operates through five segments and the largest business line is retail
banking and wealth management, representing 42.4% of their revenue in 2016.
• Following the sale of
operations in Brazil, HSBC completed a $2.5bn share buy-back in 2016, and HSBC continues
to exit unprofitable countries. Chief Executive Officer Stuart Gulliver has
exited almost 100 businesses in 18 countries.
• Contrary to
expectations, the long-term growth rate of HSBC is -18.66%, which means that it
lacks reasonably steady earnings. Based on trailing 12 month earnings, HSBC’s
P/E is 316.80, while the current market P/E is 17.00. While the mean of the
market cash flow per share is $1.67, HSBC’s cash flow per share of $0.62 fails
to exceed the market mean.
Key
points: HSBC is ripe for removal from the AIM International
Equity portfolio. HSBC was added to the International Equity portfolio in
October 2015 with a price of $49.94 and a price target of $62.06. HSBC is
trading at $42.68 as of 5/5/17. The post full-year results release gave HSBC
one of its worst days for share price performance in many years (down 6-7%). It
has underperformed 52% of the market in the past 6 months. HSBC has ultimately
fallen away from the drivers of its original recommendation and is in a
position to be trimmed before the AIM class of 2018 leaves for the summer.
HSBC’s reported income
before tax amounted to $7.1bn in 2016, 62% lower than the prior year. 2016 was
described as a year of uncertainties created by the significant and largely
unexpected economic and political changes, and HSBC’s awful Q4 2016 results
showed the impact of Brexit and the turbulent time for this London-based bank. HSBC
reported a better than expected Q1 profit on Thursday (5/4/17). Trading revenue
jumped 29%, exceeding the average 9% rise at nine of the largest global
investment banks. Retail banking and wealth management, HSBC’s largest division,
drove the revenue in the first quarter of 2017 by 15% amid rising interest
rates.
However, pretax profit
for Q1 2017 fell to $5 billion, down from $6.1 billion a year ago. The global
slowdown has negatively affected its results. Bad-debt charges in personal
finance are subsiding. Asia’s growth is slowing and competition is
intensifying. HSBC sold the operations in Brazil as the CEO Gulliver continues
to exit unprofitable countries. HSBC’s progress in attracting individual
customers in China has been slower than expected according to Reuters.
Originally, the company was pitched under the projection of growth in emerging
markets. Moving forward, the limited growth potential suggests that HSBC is no
longer suitable for the AIM International Equity portfolio.
What
has the stock done lately?
HSBC shares jumped by
3.56% as the CEO Gulliver halted revenue decline in the first quarter of 2017,
with a current price of $42.68 per share. This recent support for the stock
becomes a unique exit point as some of the drivers behind the company’s
original admission to the AIM portfolio continue to deteriorate.
Past
Year Performance: HSBC has increased 35.32% in value over
the past year, but the stock is nonetheless on the bargain table: 2-year CAGR
of the stock price is -5.95% and 3-year CAGR is -5.92%. After originally being
purchased at a price of $49.94, HSBC proceeded to fall by $7.26.
Source: Source: FactSet
My
Takeaway
Despite the 1Q 2017
results showing increased market confidence on HSBC its high capital position
to accumulate assets in Asia, stock price decreased by 6.53% since we bought it
in October 2014. ROE is down to 0.29%, P/E is 316.80, and long term EPS growth
rate is -16.88%. The future growth potential of HSBC is uncertain as Brexit
unfolds and a continued slowdown in Asia is likely. Therefore, it is recommended that the AIM
International Equity Portfolio sell HSBC.
