As SMFG Surges, the Value Story Persists.

One of Wall Street's biggest winners of the day is Sumitomo Mitsui Financial, a diversified banking company whose shares have climbed 7.3% to a price of $8.68 -- 30.13% above its average analyst target price of $6.67.

The average analyst rating for the stock is strong buy. SMFG outperformed the S&P 500 index by 7.0% during today's morning session, and by 22.4% over the last year with a return of 7.6%.

Sumitomo Mitsui Financial Group, Inc., together with its subsidiaries, provides commercial banking, leasing, securities, consumer finance, and other services in Japan, the Americas, Europe, the Middle East, Asia, and Oceania. 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.

Sumitomo Mitsui Financial's trailing 12 month P/E ratio is 10.1, based on its trailing EPS of $0.86. The company has a forward P/E ratio of 11.3 according to its forward EPS of $0.77 -- 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.

We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.

Sumitomo Mitsui Financial's PEG ratio of 1.99 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.

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 Sumitomo Mitsui 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 (%)
2022-03-31 1,545,423 -288,188 1,257,235 -93.19
2021-03-31 18,795,951 -324,711 18,471,240 170.18
2020-03-31 7,087,460 -250,836 6,836,624 73.22
2019-03-31 4,596,242 -649,542 3,946,700 n/a
  • Average free cash flow: $7,627,949,750,000.00
  • Average free cash flown growth rate: 50.1 %
  • Coefficient of variability (the lower the better): 99.4 %

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 SMFG have received an annualized dividend yield of 2719.4% on their capital.

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.

Sumitomo Mitsui 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.

Sumitomo Mitsui Financial is by most measures fairly valued because it has a very low P/E ratio and positive cash flows with an upwards trend. The stock has poor growth indicators because it has a negative PEG ratio despite its growing margins.

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.