Up 85% from its 1-year low with earnings forecast to grow 11% annually. How much value is left in this FTSE 100 star?
FTSE 100 bank Standard Chartered (LSE: STAN) has soared 85% from its 17 April 12-month traded low of £6.35.
Such a jump might deter some investors who think the stock cannot possibly rise much higher. Others may feel compelled to buy the shares for fear of missing out on future gains.
As a longtime private investor and former senior investment bank trader, I know neither view is conducive to making consistent investment gains.
I am only interested in whether there is any value left in a stock.
Is there any value left in the shares?
My starting point in any stock’s share price evaluation is comparing its key valuations with its competitors.
Standard Chartered trades on a price-to-earnings ratio of 10.1. This is overvalued against its competitors’ average of 8.8.
The group comprises NatWest and Barclays at 8, HSBC at 8.7, and Lloyds at 10.7.
That said, the stock looks undervalued on its 0.7 price-to-book ratio compared to its peers’ 0.9 average.
And the same is true of its price-to-sales ratio of 1.9 compared to its competitors’ 2.5 average.
To get to the bottom of its valuation, I ran a discounted cash flow (DCF) analysis using other analysts’ figures and my own. This pinpoints where a stock’s price should be, based on future cash flow forecasts for the firm.
The DCF shows Standard Chartered is 48% undervalued.
Given the current £11.73 share price, the fair value for the stock is technically £22.56, although market vagaries might push it lower or higher.
Does the core business support this view?
A risk for the bank remains a squeezing of its net interest income (NII) as rates in key markets fall. This is the difference in money made on loans given out and deposits taken in.
However, its 2024 results released on 21 February showed NII rose 10% year on year to $10.4bn (£8.23bn). This results from the bank operating in many countries where interest rates are not declining.
Over the same period, non-NII income jumped 20% to $9.3bn. This occurred as Standard Chartered continues to expand its fee-based rather than interest-based business.
Most notable here was a record performance from its Wealth Solutions business. This saw a 29% rise in income growth and net new money increase 61% by $44bn.
The fee-based Global Markets and the Global Banking businesses also saw strong income growth of 15%.
Overall, the bank recorded a 20% jump in underlying pre-tax profit to $6.8bn.
Analysts forecast its earnings will increase by 11% a year to the end of 2027. And it is this growth that ultimately drives a firm’s share price (and dividend) over time.
Indeed, so strong were the 2024 results that Standard Chartered announced a $1.5bn share buyback rather than the $1bn expected. These tend to support share price gains.
It also increased its dividend 37% to 37 cents. The 29p sterling equivalent of this gives a current yield of 2.5%.
Will I buy the stock?
I already have shares in HSBC and NatWest, so owning another bank stock would unbalance my portfolio.
However, if I did not have these, I would buy Standard Chartered shares as soon as possible and believe it is worth others considering. Its strong earnings growth and forecasts could push the share price and dividend much higher, in my view.
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Simon Watkins has positions in HSBC Holdings and NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
