A bank that is well undervalued with strong earnings.

Commonwealth Bank of Australia provides retail banking and financial services to personal, business and institutional clients.  The company has a market capitalization of $36 billion and a share price of $63.02.  

The bank is profitable.  In fact, it has very strong earnings, however they have been declining of late.  

Published over a year ago
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Reviewed by Ellen Johnson

Commonwealth Bank of Australia is a retail bank that has positive earnings but is trading at about 1/4 of the price it should be trading.  The company has positive earnings as well as strong earnings.  However, investors have been staying away from bank stocks.  But, look at these earnings and the strong EPS.  Maybe it will coax you into investing.  

We determine the current worth of Commonwealth Bank using both absolute as well as relative valuation methodologies to arrive at its intrinsic value. In general, an absolute valuation paradigm, as applied to this company, attempts to find the value of Commonwealth Bank based exclusively on its fundamental and basic technical indicators. By analyzing Commonwealth Bank's financials, quarterly and monthly indicators, and related drivers such as dividends, operating cash flow, and various types of growth rates, we attempt to find the most accurate representation of Commonwealth Bank's intrinsic value. In some cases, mostly for established, large-cap companies, we also incorporate more traditional valuation methods such as dividend discount, discounted cash flow, or asset-based models. As compared to an absolute model, our relative valuation model uses a comparative analysis of Commonwealth Bank. We calculate exposure to Commonwealth Bank's market risk, different technical and fundamental indicators, relevant financial multiples and ratios, and then comparing them to Commonwealth Bank's related companies.

Commonwealth Bank Investment Alerts

Commonwealth investment alerts and warnings help investors to get more proficient at understanding not only critical technical and fundamental signals but also the significant portfolio-centered indicators. These indicators include beta, alpha, and other risk-related measures that will help you in monitoring Commonwealth Bank performance across your portfolios.Please check all investment alerts for Commonwealth

Commonwealth Bank Valuation Ratios as Compared to Competition

Our valuation model uses many indicators to compare Commonwealth value to that of its competitors to determine the firm's financial worth. You can analyze the relationship between different fundamental ratios across Commonwealth Bank competition to find correlations between indicators driving the intrinsic value of Commonwealth.

Breaking down Commonwealth Bank Indicators

Commonwealth Bank of Australia provides retail banking and financial services to personal, business and institutional clients.  The company has a market capitalization of $36 billion and a share price of $63.02.  

The bank is profitable.  In fact, it has very strong earnings, however they have been declining of late.  Here is a listing of the past few years earnings-per-share for the bank:

2012:  $14.45

2013:  $14.56

2014:  $13.75

2015:  $11.83

As stated, earnings have been declining over the past many years.  However, that should not deter someone from investing in the stock.  Australia is dependent upon China for selling a great deal of their resources to.  However, China’s economy has fallen down to a year-over-year rate of growth for their GDP to 6.5%.  Granted, that is considered extremely hot for any other country to be growing at.  But, for China, that is a slowdown from its double-digit growth of so many years running.

But, the economy in the United States is expanding well.  Employment is beyond what economists consider full employment.  Incomes in the U.S. are also increasing on a year-over-year basis.  Any slowdown seen from the Great Recession is largely over and it is a matter of time before the rest of the country gets in to the swing of things and goes from marginally employed to fully employed.  

When that happens, which those seeds are already sprouting, China’s economy will begin to expand again.  Then, resources will be needed from Australia again, pushing up the financial sector more.  This process has largely begun and around the world the economies are starting to show signs of this.  Getting in on a stock like CMWAY would be an excellent opportunity to profit from the economic expansion.

But, these are just generalities.  Although CMWAY’s stock is off of its highs, it was sold off harshly.  Keep in mind this is a company that is profitable and earning an income.  EPS was $11.83 in 2015.  Yet, the stock is trading at $63.02.  This is about 5-times EPS.  That would mean, if you were to invest in the company, and the earnings were largely the same, your return would be some 20%.  That is a compelling investment return.  

There is a bit more to the numbers on this company.  Total loans show how the bank has been able to maintain some consistency in their operations, as this listing shows:

2012:  $128,725

2013:  $129,029

2014:  $136,392

2015:  $136,143

But, interest rates have been declining in AU lately, and, by coincidence, so has interest income, listed for the same period:

2012:  $36,445

2013:  $31,528

2014:  $28,779

2015:  $24,802

Despite loans remaining relatively the same, and, in fact, the bank’s loan portfolio increased over this period, the interest income did not as this second listing shows.  This is indicative of interest rates moving lower in Australia and the effects that is having.  

Still, given the overall strength of the company, the fact that you can add this stock into your portfolio and receive about a 20% return from owning the company’s stock, it is hard to pass up an opportunity like CMWAY.  The fundamentals favor this company.  The bank will likely start to swing around to positive growth by the later half of this year.  Then, if the bank’s stock were to push to the industry’s average the stock would be trading over $200.00 per share.  That is a tremendous move from its current level of $63.00 per share.  

You would not need to be holding this stock for very long to see profits.  With the world’s economy moving so will this bank’s fortunes. 

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Editorial Staff

This story should be regarded as informational only and should not be considered a solicitation to sell or buy any financial products. Macroaxis does not express any opinion as to the present or future value of any investments referred to in this post. This post may not be reproduced without the consent of Macroaxis LLC. Macroaxis LLC and David Taylor do not own shares of Commonwealth Bank. Please refer to our Terms of Use for any information regarding our disclosure principles.

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