Thinking of Buying CS's Dip? Consider This First.

Diversified Banking company Credit Suisse is taking Wall Street by surprise today, falling to $3.82 and marking a -6.6% change compared to the S&P 500, which moved 0.1%. CS is -19.75% below its average analyst target price of $4.76, which implies there is more upside for the stock. However, the average analyst rating for the stock is underperform -- a more pessimistic outlook than you might expect. Over the last year, Credit Suisse has underperfomed the S&P 500 by -43.5%, moving -58.4%.

Credit Suisse Group AG, together with its subsidiaries, provides various financial services in Switzerland, Europe, the Middle East, Africa, the Americas, and Asia Pacific. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.

Credit Suisse does not release its trailing 12 month P/E ratio since its earnings per share of $-0.68 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for CS of -5.6. Based on the company's positive earnings guidance of $0.7, the stock has a forward P/E ratio of 5.5. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the financial services sector has an average P/E ratio of 13.34, and the average for the S&P 500 is 15.97.

To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Credit Suisse's operating margins have averaged 19.0% and displayed a mean growth rate of -12.5%. These numbers show that the company may not be on the best track.

Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Credit Suisse was $35,519,000,000.00 as of its last annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $5,364,250,000.00 and they've been growing at an average rate of 131.7%. CS's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 2.4% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Credit suisse's P/B ratio of 0.2 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Financial Services sector was 1.95 as of the third quarter of 2022.

Since it has a negative P/E ratio, an exceptionally low P/B ratio, and an irregular stream of weak cash flows with an upwards trend, Credit Suisse is likely fairly valued at today's prices. The company has poor growth indicators because of no published PEG ratio and decent yet inconsistent operating margins that are shrinking. We hope you enjoyed this overview of CS's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.