The Motley Fool

Why I see 20%+ upside in this lender in 2017

The outlook for the lending industry is somewhat uncertain. Brexit is likely to cause a degree of difficulty as negotiations between the UK and EU commence. This could cause a further fall in sterling, higher inflation, and more challenges for consumers in servicing their loans. Alongside tougher rules on buy-to-lets, this may make 2017 a difficult year for lenders. However, today’s results from one lending company indicate there is at least 20% upside in its share price.

An upbeat performance

Paragon Group of Companies (LSE: PAG) has delivered underlying operating profits for the quarter ending 31 December which show that it’s making encouraging progress. They were in line with management expectations and were supported by sound underlying trends in volumes, cost control, bad debts and margins.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Significantly, each of the company’s lending and investment entities generated quarter on quarter volume growth, with total originations and investments of £380.7m versus £254.4m in the previous quarter. This was despite a tightening on rules concerning buy-to-let, which saw lenders toughen up criteria ahead of the Prudential Regulation Authority’s (PRA) underwriting changes.

Difficult outlook

As mentioned, trading conditions for lenders could worsen. The affordability of debt may decline if inflation pushes higher and wage growth fails to at least match it. However, Paragon has a sound funding position and its capital ratios remain relatively high. For example, it has a core equity tier 1 (CET1) ratio of 16.1%, while free cash balances of £269m should be able to support future growth.

The company’s forecasts are somewhat mixed. In the current year it is forecast to record a rise in its bottom line of 3%, but then deliver earnings growth of 10% next year. While this compares unfavourably to the outlook for other lenders, such as Standard Chartered (LSE: STAN), Paragon has a far less demanding valuation. For example, Standard Chartered is expected to record a rise in its net profit of 137% this year, followed by 54% next year. However, its price-to-earnings (P/E) ratio of 19.9 is more than double Paragon’s rating of 9.8.

Share price potential

In terms of the scope for a 20% rise in Paragon’s share price, its valuation suggests this will not be particularly difficult to achieve. Its low P/E ratio is difficult to justify, given that it expects to post double-digit growth next year. Therefore, a rating of 12 would give a share price gain of 23%. This appears to be realistic target and would leave it with a price-to-earnings growth (PEG) ratio of only 1.2.

Of course, Standard Chartered’s PEG ratio of 0.2 indicates it has substantially greater share price potential than its lending peer. As such, it appears to offer a superior risk/reward ratio – especially in the long run as it takes advantage of its strong position in Asia to deliver high growth rates. However, I believe that Paragon remains a sound buy that’s financially strong and which has upside of over 20%.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Peter Stephens owns shares of Standard Chartered. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.