Opinion
Why the CBA share price continues to defy gravity
Elizabeth Knight
Business columnistThe combined hours of lost sleep and career scorn that stockbroker banking analysts have suffered over the past six months thanks to the Commonwealth Bank’s gravity-defying share price gains is immeasurable.
CBA’s share price’s inexorable ascent has left massive debris in its wake – not just those highly qualified and highly paid analysts who have been screaming from the rooftops for months that the stock is overvalued.
Banking analyst Brian Johnson addresses the CBA valuation conundrum.Credit: Oscar Colman
A bunch of short-seller investors who last year placed expensive bets that CBA share price would fall are also licking their financial wounds.
In the vernacular of markets, it’s called the Pain Trade.
Hell, even CBA itself hasn’t picked up any stock in its own share buyback in recent months – presumably because it concurs with analysts that its share price has moved into nosebleed territory. For the moment, it looks to have tapped out at $119 compared with the current share price of about $126, only one-quarter of the way through its $1 billion buyback.
Not surprisingly, none of the major brokers have a buy recommendation, many have a sell and a couple have hedged their bets with a hold.
Even CBA itself hasn’t picked up any stock in its own share buyback in recent months – presumably because it concurs with analysts that its share price has moved into nosebleed territory.
In February, when the CBA share price sat at $115, I noted Commonwealth Bank analysts were engaged in an uncomfortable game of share price Twister. It involved them stretching themselves into ever more uncomfortable contortions to explain why the bank share price was booming when its fundamental-based valuation suggested it should be in retreat. Having climbed a lot higher since then, those contortions must be close to bone-breaking.
Enter MST Marquee’s banking analyst Brian Johnson – a multi-decade veteran and one of the sector’s most senior members – who is often a contrarian thinker and is a bigger CBA fan than most.
He was the first of the pack to place a (more generous) hold recommendation on CBA, breaking away from the pack that was calling it as a sell.
Like the pack, Johnson understands that, based on fundamentals, CBA’s share price punches well above its weight. He has a target price of $102.53 after applying a 50 per cent premium to the $70 fundamental valuation.
But he has a thesis that the market dynamics pushing the CBA share price up are rooted in the float of the bank some 30 years ago.
He opines that institutional shareholders are perennially underweight because retail investors have hogged the stock for decades, unwilling to sell and crystallise a whopping taxable profit.
Johnson provides the example of a retail investor who bought 400 shares in the CBA float in 1991 for $2160 and reinvested the dividends – they would be sitting on shares worth more than $270,000. And those who didn’t reinvest in dividends would have earned a fully franked dividend yield.
The fact that CBA is 50 per cent owned by sticky domestic retail investors has squeezed out institutional investors, who will be at a performance disadvantage due to being underweight in CBA, which is the second-largest member of the ASX 200.
But the supply-demand dynamics are not the only reason Johnson believes CBA is superior to its peer pack in many respects.
“CBA significantly outranks peers under our assessment framework of Franchise [best brand, deposit gathering, tech stack, declining reliance on broker distribution, etc], Management [far more collegiate cross-divisional strategy than peers] to extract excess shareholder value from comparative weakness of peers and value of dominant retail bank franchise, long-term focus as opposed to short term-ism earnings focus of peers,” Johnson said in his most recent note.
But the reality is that, in the short-term, analysts including Johnson are not forecasting earnings growth for CBA in the 2024 financial year.
Margins for all banks will remain under some pressure and while the latest May figures on loan growth are improved, they wouldn’t be considered particularly strong.
Nonetheless, in recent weeks CBA threatened BHP for the title of Australia’s most valuable company.
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