The shares of Asia-focused FTSE 100 bank Standard Chartered (LSE: STAN), currently trading at 1,280p, have fallen 21% over the last four years, massively underperforming the index, which has gained 27%.
But the story could change over the next four years, as Standard Chartered’s shares have the potential to soar 106%.
Here’s how
Standard Chartered’s minimal exposure to the US and Europe saw the bank stand steady, as its Western counterparts crashed, during 2008/9. However, last year, Standard Chartered saw a number of pressures in key businesses and markets. The bank posted a decline in profits for the first time in over a decade, and earnings per share (EPS) fell 9%.
The EPS dip isn’t the main cause of the 21% fall in Standard Chartered’s shares over the last four years. The main cause is that the market has de-rated the shares from a price-to-earnings (P/E) ratio in the mid-teens to 10.3 today.
Nevertheless, Standard Chartered is well-positioned to benefit from a long-term trend of rising trade and investment across Asia, Africa and the Middle East; and the Board has no doubt “the bank remains an exciting growth story”.
City analysts agree, and expect EPS to start rising again, albeit after minimal headway during 2014. They forecast EPS will increase at a compound annual growth rate of 7.4% from last year’s 123.7p to 164.8p by the year ending December 2017 — a total increase of 33%.
If the shares track earnings, and continue to rate on their current historic P/E of 10.3, the price will of course rise by the same 33% as EPS, putting Standard Chartered’s shares at 1,705p four years from now.
However, the analysts’ forecasts point to a company back on a growth trajectory after its 2013 earnings blip, and the de-rating of the shares that has been the big factor in the price fall of the last four years, could reverse. If Standard Chartered re-rated to the FTSE 100’s long-term average historic P/E of 16, we’d see the shares at 2,637p — a 106% rise from the current 1,280p.
Investors would also bag four years of decent dividends, as the historic yield currently stands at 4%, and analysts see growth ahead. In fact, they forecast a total of 235p a share in dividends paid out over the next four years — or £184 on a £1,000 investment.
There’s no guarantee that earnings and dividends will pan out as the analysts are forecasting, or that Standard Chartered’s shares will re-rate to the Footsie’s long-term average P/E. However, history tells us that companies are capable of delivering the kind of return I’ve outlined here; indeed, even higher gains in some cases.