Is National Australia Bank Limited’s (ASX:NAB) Future Growth Already Accounted For In Today’s Price?

National Australia Bank Limited (ASX:NAB) closed yesterday at A$28.51, which left some investors asking whether the high earnings potential can still be justified at this price. Let’s take a look at some key metrics to determine whether there’s any value here for current and potential future investors.

See our latest analysis for National Australia Bank

Can we expect NAB to keep growing?

Investors in National Australia Bank have been patiently waiting for the uptick in earnings. If you believe the analysts covering the stock then the following year will be very interesting. The consensus forecast from 12 analysts is certainly positive with earnings forecasted to rise significantly from today’s level of A$2.144 to A$2.452 over the next three years. On average, this leads to a growth rate of 10% each year, which indicates a solid future in the near term.

Is NAB available at a good price after accounting for its growth?

National Australia Bank is available at a price-to-earnings ratio of 13.3x, showing us it is undervalued relative to the current AU market average of 16.22x , and undervalued based on its latest annual earnings update compared to the Banks average of 13.53x .

ASX:NAB Price Estimation Relative to Market, August 5th 2019
ASX:NAB Price Estimation Relative to Market, August 5th 2019

National Australia Bank’s price-to-earnings ratio stands at 13.3x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, to properly examine the value of a high-growth stock such as National Australia Bank, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 13.3x and expected year-on-year earnings growth of 10% give National Australia Bank a higher PEG ratio of 1.28x. Based on this growth, National Australia Bank’s stock can be considered slightly overvalued , based on its fundamentals.

What this means for you:

NAB’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are NAB’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has NAB been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of NAB’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.