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Why Santander’s share price could be about to skyrocket

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The prospects for the global economy continue to be highly uncertain. After a decade of deflationary pressure, there seems to be a gradual transition towards higher inflation. Increased spending and lower taxes in the US could contribute to this, with the resulting rising interest rates having the potential to stifle economic growth.

Despite these risks, the prospects for global banking group Santander (LSE: BNC) appear to be positive. The stock seems to trade at a low price given its improving financial forecasts. As such, it could be worth buying for the long term.

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Turnaround potential

After experiencing a difficult couple of years, Santander now appears to be on the road to recovery. Tough trading conditions in key markets such as the UK and Brazil contributed to two years of falling earnings in 2015 and 2016. However in 2017, the bank was able to return to positive growth, with its bottom line rising by around 8%.

Looking ahead, further growth is expected in the current year and next year. Although earnings growth of 9% this year and 11% next year is not as high as it has been in the company’s past, it suggests that trading conditions are improving. It also indicates that the company’s strategy and focus on efficiency could be bearing fruit. This could mean that further growth is on offer over the medium term.

Low valuation

Despite the potential for improving financial performance, Santander continues to trade on a low valuation. For example, it has a price-to-earnings growth (PEG) ratio of just 0.9, which is low even in a banking sector that is not especially popular at the present time. Furthermore, with the stock having a dividend yield of 4.2% from a payout that is due to be covered 2.3 times by profit this year, its income prospects seem to be bright.

As such, and while the outlook for the global economy may be somewhat risky, Santander appears to offer a favourable risk/reward ratio. Therefore, now could be the perfect time to buy it.

Growth potential

Also offering growth at a reasonable price is digital services and platforms provider Kainos Group (LSE: KNOS). The company released a positive trading update on Monday which showed that its performance in the year to 31 March has been in line with market expectations.

Growth in its Digital Services division has been especially strong, with continued momentum across government and healthcare clients. Its Digital Platforms division has performed as anticipated despite constrained funding in the UK NHS continuing to impact on the short-term growth of the Kainos Evolve platforms.

Looking ahead, the company is forecast to post a 23% earnings rise in the current year, followed by further growth of 12% next year. This puts it on a PEG ratio of just 1.3, which indicates that it could have significant capital growth potential ahead. With it having no debt and strong cash generation, the stock appears to offer a worthwhile risk/reward ratio for the long run.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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