Schroders share price has crashed: is it a bargain or a value trap?

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on May 8, 2024
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  • Schroder's stock price has crashed by over 40% from its 2021 high.
  • The company’s profits have crashed hard in the past few years.
  • It has become severely undervalued and a potential takeover target.

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Schroders (LON: SDR) share price has been in a freefall after peaking at 586p in 2021. It has dropped by almost 40% to the current 362p and is hovering near its lowest level since October last year. 

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Schroders’ profits have evaporated

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Schroders, the biggest asset management company in the UK, has come under pressure even as its assets growth has increased. In a recent report, the company said that its assets under management (AUM) rose from £750 billion on December 31st to over £760 billion. This is a strong performance for a company that had over £574 billion in assets in 2020 and over £397 billion in 2015.

The challenge for Schroders is that the asset growth has not translated to more profits. The company made a profit before tax of £216 million in 2016 and £487 million in 2023. Its annual PBT in 2023 was a big drop from the previous year’s £586 million. It attributed the drop to restructuring costs as it laid off employees and reduced its office footprint.

This performance can be attributed to two main reasons. First, there has been a strong shift from actively-managed funds to passive ones. Most investors are benefiting from the low-cost approach of passive funds.

Second, the company is dealing with the Consumer Duty regulations in the UK that have forced many wealth managers to slash prices. St. James Place, a leading competitor in wealth management, has suffered substantially for slashing its customer fees.

Still, the company has made some changes to boost its performance. It has ventured into new areas, especially private markets. Its most notable deal was its acquisition of Greencoat Capital, a leading investor in energy.

It has also narrowed its strategic areas to industries like wealth management, private markets, and solutions. These areas have led to strong inflows and now account for almost 50% of total operating income. They accounted for 31% of its income in 2016.

Schroders transformation

Schroders still faces substantial challenges. However, there are signs that the company has become undervalued as its market cap dropped to £5.8 billion. That brings its PE ratio to about 14, which is lower than the FTSE 100 average of 18. 

That valuation multiple means that it may become a takeover target as interest in British companies rise. The buyer would receive a quality British brand with over £760 billion in assets. But to do so, the company would need to convince Schroders’ family that controls about 54% of the firm.

Another opportunity is that the company is now looking for a new CEO after Peter Harrison announced his intention to retire. As we have seen with Rolls-Royce, a new CEO can have major implications in a company. Its stock has surged after Tufan Erginbilgic became CEO in 2023. 

Schroders share price forecast

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Schroders share price

SDR chart by TradingView

Turning to the daily chart, we see that the SDR stock price formed a double-top pattern at 461p between February and March last year. It then crashed to a low of 345p in November 2023. Now, the stock has formed what looks like a double-bottom pattern at 346p, a positive move. 

However, it remains below the 50-day and 100-day moving averages, which is an indicator that bears are still in control. 

Therefore, at this stage, I suspect that the stock will continue to consolidate as traders wait for the next catalyst, which will happen in August as the company releases its half-year results.

A break below the support at 346p will point to more downside since it will invalidate the double-bottom pattern formation. If this happens, the stock could drop to 320p, its lowest swing in 2022.

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