Is Hargreaves Lansdown plc still a buy after a 170% rise in five years?

Hargreaves Lansdown head office
Hargreaves Lansdown head office

Hargreaves Lansdown(LSE: HL) has been a stock market darling for some time now and - and for good reason. The UK's largest independent financial advisor has an attractive and incredibly profitable business model. Its operating margins are the stuff of legend, clocking in at 56% last year.

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This abnormal profitability is facilitated by the cost structure of the business. The company's primary expenses are its staff and IT systems. Once these are in place, new business can be taken on with little extra cost, meaning profits should increase at a greater rate than revenue.

This is even more impressive considering the company's competitive fees, with funds available for only 0.45% annual management charge, dropping to as little as 0.25% if you're rolling in it

Combine that with an impressive track record of increasing assets under management (AUM) and it's easy to see why Hargreaves Lansdown inspires savers.

The company's shares have sky rocketed 170% in the last five years, but savvy investors will have realised the majority of this gain was made a few years ago. Indeed, the share price hasn't made any headway since the start of 2014. This is largely due to a slowdown in revenue growth in recent years and fears surrounding the sustainability of those margins in an ever-more-competitive world.

Hargreaves Lansdown (£m)

2016

2015

2014

2013

2012

Assets Under Management

61,700

55,200

46,900

36,400

26,300

Revenue

388

395

358

292

238

Operating Profit

218

198

208

192

151

Profit Before Tax

219

199

209

195

152

Net Interest

0.63

0.99

1.77

2.88

2.23

Crimped growth?

The shares currently trade at 27 times 2016's profit before tax, a valuation that clearly prices-in continued expansion. However, I'm not so sure that Hargreaves can return to the growth levels of the past, given its established market share and the increasingly varied and inexpensive options now available for investors.

Furthermore, I have concerns about its short-term performance. Yes, the Motley Fool is all about investing for years, rather than months or days, but it makes no sense to overpay now for a business regardless of your envisioned holding period.

Brexit currently casts doubts over stock markets, which could potentially be bad news for Hargreaves Lansdown. If stock markets were to fall, AUM would fall too, thus reducing the fees it earns.

Those seductive margins could be under threat too, given that online investment platforms have increased competition and brought rates across the industry down to all-time lows. In short, I believe there will likely be a more attractive price point to enter Hargreaves Lansdown.

Loyal customers

On the plus side, this risk is offset a little by an impressive 93.5% customer retention rate. These loyal customers, myself among them, are a recurring source of revenue to Hargreaves and represent defensible revenues. Even if AUM falls temporarily due to falling markets, chances are these customers will keep their accounts open and be a source of profitability again when markets recover.

In my opinion, Hargreaves Lansdown is more than strong enough to survive a recession and none of the above threats are likely to destroy a long-term investment thesis, but the current share price doesn't adequately discount the risks facing the business and seems to price-in an uptick in growth, which I believe to be far from guaranteed in the short term. So, even though it's a great business, I wouldn't buy Hargreaves Lansdown at these prices.

A more suitable share for growth?

Hargreaves Lansdown might only be fit for the your watch list right now, but our analysts have found another best-in-class British business that's expanding at a rapid rate and looks priced to go. Better yet, this suave suitor is growing revenues internationally too, reducing its dependence on post-Brexit Britain.

Click here now to find out why this company is our top growth share.

Zach Coffell has no position in any shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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