There’s no surefire way to find FTSE shares with guaranteed growth potential. For that, I’d need a crystal ball. However, checking certain metrics can provide an idea of whether a current price is good value or not.
Three metrics I used to evaluate value are price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and discounted cash flow (DCF) analysis. P/E and P/B ratios evaluate whether a share price is appropriate compared to earnings and book value. A discounted cash flow (DCF) model considers whether the company has enough free cash flows to justify the current price.
Using those metrics, these are three options that look attractive to me and they could be worth doing further research.
Standard Chartered
My portfolio’s already heavily weighted towards bank stocks so I’m not really looking to add more. Still, I couldn’t help but notice Standard Chartered (LSE: STAN) has a low P/E ratio of 8.1. That’s well below the UK market average of 16.8. Its P/B ratio of 0.5 is also attractive. That’s below rival bank HSBC, at 0.8, and the UK banking industry average of 0.7.
Future cash flow estimates suggest the current price could be undervalued by 63%.
But the price is already up this year, recently hitting a 12-month high. Now at £7.13, it’s only down 0.28% in the past five years. Further growth may require a strong economic recovery, which may (or may not) be on the cards.
With interest rate cuts expected this year, the banking sector could benefit. But with much of Standard’s activities focused in Asia, I would carefully consider this market’s prospects before buying.
International Consolidated Airlines Group
International Consolidated Airlines Group (LSE: IAG) is the parent company of British Airways, Iberia, Vueling and Aer Lingus. It’s down 60% since early 2020, struggling for years to regain losses incurred during Covid. Now with a lingering debt load of €16bn compared to only €3.28bn in equity, it has a debt-to-equity ratio of 490%.
That seriously limits any future funding initiatives aimed at boosting profits.
But with that all behind us and air travel back at high capacity again, things should improve. The current P/E ratio is very low, at 3.7 – far below the UK market average and almost half the airline industry average of 6.6. And future earnings estimates put the fair value closer to £2.30, not the current price of £1.76.
With the summer holidays coming, I wouldn’t be surprised to see a boost in sales.
Imperial Brands
Imperial Brands (LSE: IMB) is working to distance itself from the stain of its tobacco business. While still the main source of profit, it’s aware that times are changing and is shifting to less harmful next-generation products like vapes. The long-term success of this plan remains to be seen.
For now however, the price looks cheap at 50% off its 2016 high. With earnings up 25% in the past year, future cash flow estimates put it at 62% below fair value. And with a P/E ratio of only 8.3, it’s below both the UK market and tobacco industry average. On top of that, it has a very attractive dividend yield of 7.2%, which is well-covered by cash flows.
The post 3 reasons why these FTSE shares still look like huge bargains to me appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Mark Hartley has positions in HSBC Holdings and Imperial Brands Plc. The Motley Fool UK has recommended HSBC Holdings, Imperial Brands Plc, and Standard Chartered Plc. 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.
