Let's Take a Closer Look at the Fundamentals of BBD

One of Wall Street's biggest winners of the day is Banco Bradesco Sa, a regional banking company whose shares have climbed 4.7% to a price of $2.89 -- 33.26% below its average analyst target price of $4.33. The average analyst rating for the stock is buy. BBD outperformed the S&P 500 index by 5.5% during today's afternoon session, and by 2.3% over the last year with a return of -17.9%.

Banco Bradesco S.A., together with its subsidiaries, provides various banking products and services to individuals, corporates, and businesses in Brazil and internationally. 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.

Banco Bradesco's trailing 12 month P/E ratio is 6.4, based on its trailing Eps of $0.45. The company has a forward P/E ratio of 5.9 according to its forward Eps of $0.49 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US financial services companies is 13.34, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

BBD’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.

When we perform the calculation for Banco Bradesco, we obtain a PEG ratio of 4.27, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Banco Bradesco's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 -101,995 -4,410 -106,405 -177.01
2020-12-31 142,433 -4,265 138,168 657.59
2019-12-31 -19,454 -5,326 -24,779 -107.53
2018-12-31 -6,497 -5,443 -11,940 n/a
  • Average free cash flow: $-1,239,180,500.00
  • Average free cash flown growth rate: 124.4 %
  • Coefficient of variability (the lower the better): 8224.8 %

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. A negative cash flow is common, even among successful companies. But if BBD's free cash flow continues on its negative trend, it may not be able to sustain its dividend payments, which over the last 12 months has yielded 40.3% 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.

Banco Bradesco'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.

Banco Bradesco is by most measures fairly valued because it has a very low P/E ratio, an exceptionally low P/B ratio, and an unconvincing cash flow history with an upwards trend. The stock has moderate growth prospects because it has a an inflated PEG ratio and strong net margins with a positive growth rate. We hope you enjoyed this overview of BBD's fundamentals.

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.