One of Wall Street's biggest winners of the day is Credit Suisse, a diversified banking company whose shares have climbed 9.1% to a price of $3.37 -- 23.58% below its average analyst target price of $4.41.
The average analyst rating for the stock is underperform. CS may have outstripped the S&P 500 index by 9.2% so far today, but it has lagged behind the index by 57.5% over the last year, returning -67.7%.
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 included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
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 -4.9. Based on the company's positive earnings guidance of $0.7, the stock has a forward P/E ratio of 4.8.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the financial services sector has an average P/E ratio of 13.34, and the average for the S&P 500 is 15.97.
To better understand the strength of Credit Suisse's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($) | Operating Expenses ($) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 18,308,000,000.0 | 16,123,000,000.0 | 11.93 | -45.17 |
| 2020-12-31 | 21,000,000,000.0 | 16,430,000,000.0 | 21.76 | -1.63 |
| 2019-12-31 | 21,584,000,000.0 | 16,809,000,000.0 | 22.12 | 9.18 |
| 2018-12-31 | 20,608,000,000.0 | 16,432,000,000.0 | 20.26 | n/a |
- Average operating margins: 19.0 %
- Average operating margins growth rate: -12.5 %
- Coefficient of variability (lower numbers indicate less volatility): 25.2 %
Credit Suisse's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 36,938,000,000.0 | -1,419,000,000.0 | 35,519,000,000.0 | 592.02 |
| 2020-12-31 | -6,031,000,000.0 | -1,188,000,000.0 | -7,219,000,000.0 | 61.25 |
| 2019-12-31 | -17,338,000,000.0 | -1,293,000,000.0 | -18,631,000,000.0 | -258.05 |
| 2018-12-31 | 12,883,000,000.0 | -1,095,000,000.0 | 11,788,000,000.0 | n/a |
- Average free cash flow: $5,364,250,000.00
- Average free cash flown growth rate: 131.7 %
- Coefficient of variability (lower numbers indicating more stability): 441.8 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in CS have received an annualized dividend yield of 3.2% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
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.
With a negative P/E ratio, an exceptionally low P/B ratio, and an irregular stream of weak cash flows with an upwards trend, we can conclude that Credit Suisse is probably fairly valued at current prices. The stock presents poor growth indicators because of its inconsistent operating margins with a negative growth trend, and no published PEG ratio.
