Just because a FTSE stock has risen a lot does not mean there is no value in it. The business itself may simply be worth more than it was before. Or the market might finally be catching up to what it was genuinely worth in the first place.
Both reasons apply to emerging markets specialist bank Standard Chartered (LSE: STAN), in my view. And despite its currently trading at around a one-year high, I think the stock could still go much higher.
Are the shares undervalued?
To ascertain whether the shares are underpriced, I begin by looking at the price-to-earnings ratio (P/E).
Standard Chartered trades at a P/E of just 7.2 against an average for its competitor banks of 7.7. So it is cheap on this basis.
The same is true of another key stock valuation measure I have found most useful over the years – the price-to-sales ratio (P/S). On this, the bank presently trades at 1.6 against a competitor average of 2.1.
To translate these measures into share price terms, I ran a discounted cash flow analysis. Using other analysts’ figures and my own, this shows Standard Chartered shares are still 60% undervalued, despite their price rise.
Therefore, a fair value for the stock is £23.63 compared to its current £9.45 price.
It could fall, of course. However, it underlines to me that the shares could also go a lot higher from here.
What’s the growth outlook?
A key risk for the bank has been declining net interest income (NII) as rates in some of its major territories fall. NII is the difference in the money it pays out on deposits and takes in on loans.
Crucially though, Standard Chartered has shifted more towards a fee-paying business than an interest-based one.
For example, its Q3 results released on 30 October showed operating income from its Wealth Solutions business soared 32% year on year to $694m (£547m). For its Global Markets operation, operating income increased 16% to $840m.
Profits at its Corporate & Investment Banking division (which includes Global Markets) rose 9% to $1.365bn. And in Wealth & Retail Banking (including Wealth Solutions), profits increased 11% to $742m.
A risk for the bank is that competition in its fee-based businesses may increase, pressuring its income and profit margins. However, it expects operating income to increase at a compound annual growth rate of 5%-7% to 2026.
It also forecasts return on tangible equity (RoTE) to be around 13% by that year, up from the previous 12% estimate. RoTE is the same as return on equity except that it excludes intangible elements such as goodwill.
It also plans to return at least $8bn to shareholders between now and 2026 through dividends and share buybacks. Buybacks tend to support share prices.
Will I buy the stock?
At my later stage in the investment cycle (I am over 50 now), I focus on high-yield stocks. Standard Chartered’s present yield of just 2.2% does not fit this requirement for me now.
However, if I were even 10 years younger, I would buy the stock without any hesitation for its growth potential. This looks to me to be extremely high, which should power the share price much higher with it over time.
This post was originally published on Motley Fool
