Importance of P/E Ratios When Considering Investment in Financial Stocks

  • Nov 19, 2019 AEDT
  • Team Kalkine
Importance of P/E Ratios When Considering Investment in Financial Stocks

When it comes to valuing a stock, P/E is the most commonly used multiple. It measures the current market share price of a company relative to its earnings (each share). Therefore, companies with no earnings don’t trade on a P/E multiple. In addition to showing whether a company is overvalued or undervalued, it represents how a stock is compared to the industry group or a benchmark.

As mentioned above, the benefit of P/E ratio is to get an idea on how a stock is performing or how much of a premium an investor is ready to pay for a stock. It directly incorporates the key fundamentals of the company and generally takes into consideration the below mentioned factors:

  • Historic Performance: The company with a good track record often trades at a higher P/E multiple as compared to the one with inconsistent performance.
  • Growth: Growth is one of the most important factors taken into account for P/E ratio. Companies which have high growth generally have a higher P/E ratio relative to the ones with lower growth.
  • Capital Structure: P/E is highly dependent on the capital structure of the company. The firm with higher leverage is often very risky and trades at a low multiple. This is because debt affects both the components of P/E ratio, earnings and the price multiple.
  • Dividend Pay-Out: Usually, the companies which pay a regular and high dividend shows a fundamental growth and investors consider the company as rewarding. Thus, it trades at a higher P/E multiple.
  • Business Cycle: The companies which are cyclical in nature often trade at low P/E multiple than those which are not affected by the economic cycle.

PE is not a good valuation metric for financial stocks; however, investors prefer to use price to book ratio to gaze the valuation of a financial sector player.

Let us discuss some financial stocks and their P/E ratios.

Money3 Corporation Limited (ASX: MNY)

Money3 Corporation Limited (ASX: MNY) provides financial services and specialises in the delivery of secured automotive loans as well as secured and unsecured personal loans.

Financial Highlights: During the first quarter of FY20, the company had a strong organic growth with record lending volumes in the concerned period and October 2019. Its revenue grew by 48.8% to $30.5 million from $20.5 million in Q1 of FY19. Post divestment reallocation of corporate overheads, EBITDA margins improved, while EBITDA increased by 41% from $10.5 million in Q1 FY19 to $14.8 million in Q1 FY20. During the quarter, sustainable and strong NPAT margins were approximately 25% in a growing business with scale upside expected in FY21. This was underpinned by a 35% increase in loan applications in Q1 FY20 in the prior corresponding period.

Money3 Corporation Limited

The company expects a strong leading momentum of over 25% loan book growth and anticipates its NPAT to be in excess of $30 million in FY20.

Stock Performance: The stock of MNY was trading at $2.170, up 1.402% on November 19, 2019 (AEST 02:37 PM). As per ASX, the stock gave a return of 30.09% on a YTD basis and a return of 1.90% in the last 3 months. This led the stock to trade towards its 52-week high band with a P/E multiple of 13.150x.

Suncorp Group Limited (ASX: SUN)

Suncorp Group Limited (ASX: SUN) provides banking, insurance, wealth and other financial solutions to the retail, corporate and commercial sectors.

Capital Notes 3 Bookbuild Completion: Suncorp Group Limited has successfully completed the Bookbuild for its offer of Capital Notes 3 and has allocated $300 million of the notes under the Broker Firm Offer and Institutional Offer on a firm basis, with a margin of 3% p.a.

FY20 Priorities: The company in its recent presentation at UBS outlined key priorities for FY20 and stated that it would improve the performance of core businesses by realigning the organisational structure. The company, which is embracing regulatory change, would continue to make investments to improve customer outcomes; including remediation and regulatory project work.

Stock Performance: The stock of Suncorp Group Limited was trading at $13.335, up by 0.038% on November 19, 2019 (AEST 02:43 PM). As per ASX, the performance of the stock increased by 1.48% in the past 30 days. The stock with an annual dividend yield of 5.25% was trading at a P/E multiple of 98.450x.

Commonwealth Bank of Australia (ASX: CBA)

Commonwealth Bank of Australia (ASX: CBA) provides retail banking, business and private banking services, in addition to institutional banking, wealth management and international financial services.

Dividend/Distribution – CBAPI and Issue of Capital Notes: The company declared a dividend of 91.88 cents on CBAPI - Capital Notes Deferred Settlement, which is to be payable on March 16, 2020. Moreover, Commonwealth Bank of Australia announced to have raised $1.65 billion by allotting 16,500,000 CommBank PERLS XII Capital Notes at the application price of $100 each.

Financial Highlights: During the September quarter, net profit of the company went up by 5% to $2.3 billion. Additionally, the company managed to maintain a CET1 capital ratio of 10.6%, up by 35 bpts. During the quarter, operating expenses increased by 2% due to higher staff costs and IT amortisation, partly offset by business simplification savings. For the reported quarter, funding and liquidity positions of the bank remained strong, with customer deposit funding at 69% and the average tenor of the long-term wholesale funding portfolio at 5.4 years. The Group issued $5.8 billion of long-term funding in the quarter.

Commonwealth Bank of Australia

Stock Performance: As per ASX, the stock of CBA gave a return of 3.80% in the past 6 months and a return of 5.31% in the last 30 days. This led the stock price to trade towards its 52-week high of $83.990. As on November 19, 2019 (AEST 02:49 PM), the market capitalisation of the company stands at $142.22 billion. In terms of valuation, the stock was trading at a P/E multiple of 16.540x with an annual dividend yield of 5.36%.

Resimac Group Ltd (ASX: RMC)

Resimac Group Ltd (ASX: RMC) is a residential mortgage lender and multi-channel distribution business specialising in prime and specialist lending.

Significant Rise in NPAT: FY2019 ended June 30, 2019 was a positive year for the company. During the year, statutory net profit of the company went up by 86% to $47.2 million. The reduction in the cost to income ratio from 61.7% to 56.6% showed effective cost management discipline within the organisation. Total revenues and other income of the company went up by 21% on the prior year and stood at $468.76 million. The Group’s net assets increased by 21% from June 30, 2018, largely attributable to underlying profit growth.

Resimac Group Ltd

Stock Performance: As per ASX, the stock of RMC gave a return of almost 85% in the past 6 months and a return of 11.96% in the past 30 days. This led the stock to trade close to its 52-week high of $1.090. As at November 19, 2019 (AEST 02:53 PM), the stock was trading at $1.075 and the market cap of the company stood at $439.1 million. In terms of valuation, it was trading at a P/E multiple of 9.190x, with an annual dividend yield of 1.85%.

ClearView Wealth Limited (ASX: CVW)

ClearView Wealth Limited (ASX: CVW) is a financial company, which provides life insurance, wealth management and financial planning solutions in Australia.

Financial Highlights: During the year (FY19 ended June 30, 2019), reported NPAT decreased by 85% to $4m from $26.6 million in FY18. This reflected challenging market environment, poor lapse and claims performance, and remediation and restructure costs, impairment write-offs. In FY19, the group paid $69 million in life insurance claims to customers and their families, a substantial increase over the previous year.

Stock Performance: As per ASX, the performance of the CVW stock went down by 25.32% in the past 6 months and gave a negative return of 3.36% in the past 30 days. This led the stock price to trade close to its 52-week low of $0.500. on November 19, 2019 (AEST 02:58 PM), the stock was trading at $0.565. In terms of valuation, the stock was trading at a P/E multiple of 91.270x with a market cap of $388.96 million.

ASX Limited (ASX: ASX)

ASX Limited (ASX: ASX) is a fully integrated exchange across multiple asset classes - equities, fixed income, derivatives and managed funds.

Monthly Update on Activities: In October 2019, ASX raised a total capital of $5.7 billion, down 54% on the previous corresponding period.

For Trading in Cash Markets, the average daily number of trades was reported 19% higher than the year-ago period, while the average daily value traded on-market of $4.5 billion fell by 2% year on year. Volatility, which is measured by the average daily movement in the All Ordinaries Index, stood at 0.6% in the reported month representing an increase of 0.3% month on month.

For Trading in Futures, average daily futures and options on futures volumes declined by 3% year on year in October.

Stock Performance: As per ASX, the stock of ASX gave a return of 36.69% on a YTD basis but declined by 2.72% in the past 30 days. As on November 19, 2019 (AEST 03:03 PM), the market capitalisation of the company stands at $15.53 billion and its stock was trading at $81.110, up 1.122%. In terms of valuation, it was trading at a P/E multiple of 31.570x.


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