Standing out among the Street's worst performers today is Banco Santander, a commercial banking company whose shares slumped -4.0% to a price of $4.55, 28.91% below its average analyst target price of $6.4. SAN lagged the S&P 500 index by -4.0% so far today and by -14.3% over the last year, returning 16.2%.
Banco Santander, S.A. provides various financial services worldwide. 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 Santander's trailing 12 month P/E ratio is 5.8, based on its trailing EPS of $0.78. The company has a forward P/E ratio of 5.7 according to its forward EPS of $0.79 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US finance companies is 20.04, and the S&P 500 has an average of 29.3. 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.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Banco Santander was $-60172000000 as of its last annual report. 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. The company's average cash flow over the last 4 years has been $16.46 Billion and they've been growing at an average rate of -17.3%. SAN's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 4.1% 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 santander's P/B ratio of 0.72 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 Finance sector was 1.86 as of the third quarter of 2024.
Since it has a Very low P/E ratio, an exceptionally low P/B ratio., and positive cash flows with a downwards trend, Banco Santander is likely overvalued at today's prices. The company has poor growth indicators because of a PEG ratio of less than 1 and no published profit margins with a unknown rate of growth. We hope you enjoyed this overview of SAN's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
