LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth At A Reasonable Price," or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.
What are HSBC Holdings's earnings expected to do?
For the current year, HSBC is expected by City analysts to rebound in earnest from last year's 20% earnings per share (EPS) decline, although growth is expected to decelerate in 2014.
2013's rapid earnings growth leaves the company trading on a PEG ratio below the value marker of 1, although next year's EPS slowdown will see this move back above this measure. The bank currently deals just north of a price-to-earnings (P/E) ratio of 10 -- any number around or below 10 is classified as good value -- and is expected to drop under this figure in 2014.
Does HSBC Holdings provide decent value against its rivals?
|Prospective P/E Ratio||14.7||42.1|
|Prospective PEG Ratio||4.7||0.9|
HSBC comfortably outstrips the forward PEG averages of both the FTSE 100 and the banking sector, although a sub-1 reading for the banks still represents decent bang for your buck. As well, HSBC also surpasses both groups in terms of P/E readout.
HSBC qualifies as a sound GARP investment for the short term. And I reckon that the bank is a solid bet to keep marching skywards as its ambitious restructuring program, coupled with steady revenue growth in emerging markets, bolsters excellent earnings potential.
Earnings growth on the right track
In its latest investor update released last month, the bank cut its cost efficiency ratio target to the more realistic target around the "mid-50s" over the next three years, down from the 48% to 52% previously spelled out. However, HSBC said that it still expects return on equity to register between 12% and 15%.
The bank said that it plans to concentrate operations on "faster growing markets and Commercial Banking" through to 2016, building on the exceptional growth seen from these juicy developing markets in recent years. Indeed, the Asia-Pacific territory now accounts for nine-tenths of group profits, up from 60% in 2011.
As well, HSBC has delivered around $4 billion of cost reductions on an annual basis, achieved in part through the closure or divestment of 52 non-core or poorly performing businesses. I expect a more streamlined and focused HSBC to deliver solid earnings growth both now and over the longer term.
The expert's guide for intelligent investors
If you already hold shares in HSBC Holdings, check out this newly updated special report which highlights a host of other FTSE winners identified by ace fund manager Neil Woodford.
Woodford -- head of U.K. Equities at Invesco Perpetual -- has more than 30 years' experience in the industry, and boasts an exceptional track record when it comes to selecting stock market stars.
The report, compiled by The Motley Fool's crack team of analysts, is totally free and comes with no further obligation. Click here now to download your copy.
Royston does not own shares in HSBC Holdings. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.