Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.
Today I’m looking at Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) to ascertain if its share price has the potential to push higher.
Current market sentiment
The best place to start assessing whether or not RBS’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.
Unfortunately, at present it would appear that the market is disappointed with RBS’s performance as the bank continues to report rising losses and asset sales. Further, it would appear that RBS is still many years away from a full return to health.
Still, there are glimmers of hope for RBS. For example, the bank is set to benefit from the economic recovery here within the UK. Additionally, RBS should benefit from the sale of two business, Citizens Bank in the US and the British retail bank, Williams & Glyn. Both banks should attract respectable prices from prospective buyers.
Upcoming catalysts
Fortunately for RBS’s investors, they will not have to wait long for a catalyst to drive the bank’s share price higher as RBS’s expected to return to profit during 2014.
Indeed, according to City analysts RBS is expected to report a pre-tax profit of £3.7bn for 2014, equating to earnings per share of 23.6p. What’s more, City estimates currently forecast the bank’s earnings to jump 12%, to 26.4p per share during 2015.
In addition, RBS’s share price should benefit from the resumption of dividend payments to shareholders. Once again, the City believes that RBS will offer a token dividend of 0.4p per share during 2014, rising to 1.5p per share for 2015 — a yield of 0.5%.
Valuation
As RBS reported a loss for 2013, it’s not possible to value the bank on a historic basis. However, it is possible to value RBS’s shares based on the profit estimates above. Specifically, at current levels RBS is trading at a forward P/E of 13.2 for 2014 and a ratio of 11.8 for 2015. Unfortunately, this valuation looks expensive in comparison to RBS’s main UK peer, Lloyds.
Lloyds is set to report earnings per share of 7.3p for this year, which puts the bank on a forward P/E of 10. Nevertheless, RBS’s peers within the wider banking sector currently trade at an average P/E of 23, making the bank’s shares seem cheap.
Foolish summary
So overall, based on RBS’s low valuation in relation to peers and the bank’s return to profit, I feel that there is still time to buy Royal Bank of Scotland.
