HL trading at 31x next 12 months p/e is “unjustified” given sideways and stalling flows, it says, suggesting St James’s Place represents more stable rise in net flows.
The broker says: “St James’s Place net flows held up much better than HL’s through choppy markets last year, with St James’s Place +17% vs HL’s -18%.
“The more stable net flow profile is one of the key reasons we prefer St James’s Place to HL shares.”
Currently rated one of the broker's highest-conviction short positions, HL is said to have suffered a declining revenue growth since the Retail Distribution Review (RDR), with flows moving “sideways since 2013” and faces rising competitive pressures that could hamper its margins.
Bernstein lists HL's target price of 1,100p, suggesting a 19% downside risk to its current share price of 1,351p.
The note says: “We rate HL underperform on the basis of a full valuation, stalling growth in net flows, and threats to its revenue margin.”
The stock features in the top 10 holdings of Nick Train's Lindsell Train UK Equity vehicle, Baillie Gifford UK Equity Alpha, run by Gerard Callahan and BlackRock UK Fund, managed by Nicholas Little.
It also features in the Liontrust Sustainable Future Defensive Managed portfolio, run by Peter Michaelis and his team and the Barclays UK Opportunties Fund.
Recognising the power of the Hargreaves Lansdown brand, with nearly 40% market share of the direct-to-consumer (D2C) platform space, Bernstein says it likes the business model, with built-in operating leverage and potential for growth but notes that growth is slowing.
It adds: “HL's revenue margin has declined post-RDR and been cut in half over the past decade. Whilst we don't price for it, it may fall further.
“HL investing costs are relatively high, and there is evidence to suggest that D2C consumers now value price above brand.”
It also points to “intensifying” competition, with Vanguard bring a D2C offering to the UK this year, the launch of Barclays Smart Investor and others pushing their fixed price, rather than percentage-based tariff, platforms, while warning HL its fee margins were at risk of commoditisation.