This Friday, shares of Banco Santander have fallen -3.2%, vindicating the analysts who have given the stock an average rating of hold. But could they be wrong? Some factors show that Banco Santander may actually be undervalued at today's prices, giving long term investors a potentially interesting opportunity.
Over the last year, Banco Santander shares have moved 14.1% while trading between the prices of $2.26 and $4.09. This represents a 3.0% difference compared to the S&P 500, which moved 11.5% over the last 52 weeks.
At its current price of $3.32 per share, SAN has a trailing price to earnings (P/E) ratio of 5.8 based on its 12 month trailing earnings per share of $0.57. Considering its future earnings estimates of $0.49 per share, the stock's forward P/E ratio is 6.8. In comparison, the average P/E ratio of the Finance sector is 14.34 and the average P/E ratio of the S&P 500 is 15.97.
We can also compare the ratio of Banco Santander's price to its book value. A company's book value refers to its present equity value: what is left when we subtract its liabilities from its assets. SAN has a book value of 0.63, with anything close or below one indicating a potentially undervalued company.
The final element of our analysis will touch on Banco Santander's capacity to generate cash for the benefit of its shareholders or for reinvesting in the business. For this, we look at the company's levered free cash flow, which is the sum of all incoming and outgoing cash flows, including the servicing of current debt and liabilities. Banco Santander has a free cash flow of $16.87 Billion, which it uses to pay its shareholders a 3.4% dividend.
At Market Inference, we will keep monitoring Banco Santander to see if the contrarian thesis in this stock will be vindicated. Going against the grain can be an excellent way for investors to extract value from the stock market, but it's never a good idea to apply a strategy for its own sake. Do your own research and make sure that the facts support your decision.
