KB

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

Regional Banking company KB Financial is standing out today, surging to $44.58 and marking a 6.6% change. In comparison the S&P 500 moved only 0.9%.

KB currently sits within range of its analyst target price of $46.43, which implies that its price may remain stable for the near future.

Surprisingly, analysts give the stock an average rating of strong buy, which shows that they believe prices could continue to move. Over the last year, KB Financial shares have outperformed the S&P 500 by 7.1%, with a price change of -11.5%.

KB Financial Group Inc. provides a range of banking and related financial services to consumers and corporations in South Korea 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.

KB Financial's trailing 12 month P/E ratio is 4.9, based on its trailing Eps of $9.1. The company has a forward P/E ratio of 4.6 according to its forward Eps of $9.64 -- 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.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide KB Financial's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 1. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing KB's growth potential .

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 KB Financial'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 -6,700,265 -478,309 -7,178,574 40.91
2020-12-31 -11,540,694 -607,721 -12,148,415 -243.63
2019-12-31 9,400,706 -942,293 8,458,413 n/a
  • Average free cash flow: $-3,622,858,666,666.70
  • Average free cash flown growth rate: -101.4 %
  • Coefficient of variability (the lower the better): 296.8 %

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 KB'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 8823.5% 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.

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.

KB Financial's P/B ratio of 0.0 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 very low P/E ratio, no published P/B ratio, and an unconvincing cash flow history with a downwards trend, we can conclude that KB Financial is probably overvalued at current prices. The stock presents Mixed Growth Prospects because of its strong net margins with a stable trend, and an average PEG ratio.

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.

ON FOCUS