How Much Upside Is There in HSBC Holdings?

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LONDON -- Titan bank HSBC  (LSE: HSBA  )   (NYSE: HSBC  )  is the second-most valuable company in the FTSE 100. It has a fantastic track record, making profits and paying dividends throughout the financial crisis.

With a global footprint, HSBC is considered the strongest of all London-listed banks.

Despite that strength, shares in HSBC are nearly 15% lower than where they were before the crash. Recent times have treated the stock much better. In the last 12 months, shares in HSBC are up 41%. So far this year, they are 12% better off, trailing the FTSE slightly as riskier companies have come into fashion.

Before the financial crisis, shares in HSBC traded for over 800p. In 2007, the bank reported earnings per share (EPS) of $1.38: then a price-to-earnings (P/E) ratio of around 9. Dividends for 2007 totalled $0.81: an approximate yield of 6.5%.

The financial crisis pushed HSBC into issuing more shares in a £12.5 billion fund raising in 2009. This increased number of shares in issue. In the tougher trading environment that followed, profits per share and dividends have fallen.

Last year, the bank made EPS of $0.74 and paid a dividend of $0.45. Both figures are well down on what the bank was making pre-crisis.

Profits and dividends are forecast to increase this year and next. Broker consensus is for EPS of $0.98 in 2013, before rising 10.4% in 2014. Dividends are expected to hit $0.52 per share this year before rising to $0.58 in 2014.

That forecast growth puts HSBC today on a 2014 P/E of 10.2 and a prospective yield of 5.2%.

The average FTSE 100 share trades on a P/E of 13.9. Despite all of its success, HSBC is being offered at just 11.3 times 2013 forecast earnings. Such a discount is unjustified in my opinion -- even bailed-out bank Lloyds trades on a higher 2013 P/E.

For HSBC, a P/E of 13 would be fair -- i.e. a 15% rise from here.

If HSBC can improve it's earnings forecast by 10% and its P/E by 15%, then the shares would rise 27%. This is the classic growth/value investor's double whammy and one of the ways that the stock market can dramatically increase your wealth. For more strategies that could ramp up the value of your investment portfolio, get the free Motley Fool report "10 Steps to Making a Million in the Market." This report is completely free and will be delivered to your inbox immediately. Just click here to get your copy today.

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