NAB to hit $40?

Despite rising by 54% in the past 12 months, a number of analysts have come out recently predicting further price rises are on the horizon for National Australia Bank (ASX: NAB).

One of the most recent and significant is the analysis by long-term critic Brian Johnson, which put a $40 price target on the company. Mr Johnson, who is widely regarded as Australia’s best bank analyst, believes that the bank has turned the corner after what he sees as a decade of mistakes.

Certainly, the bank’s share price has justifiably lagged its competitors over the medium term as the poorly timed entry into the UK market, the $4 billion writedown of US lending operation Homeside, a $600 million technology blowout, and the $360 million forex trading scandal have held back the share price. The failures have resulted in only 12% earnings per share growth in the 12 years to 2012, compared to an average of 137% for the other major banks.

The analysis focused on the long-term discount on the share price as a result of the frequent disappointments, however Mr Johnson is now of the opinion that there are seven main factors which have transformed the outlook for the business:

  1. Improved management,
  2. Reduced risk of large scale sell-offs
  3. Current discount to intrinsic value
  4. Reduced risk profile
  5. Strong earnings per share growth
  6. Improved UK economic conditions
  7. Better return on equity compared to rivals

The report followed Goldman Sachs broker Richard Coppelson recently telling investors to sell Commonwealth Bank (ASX: CBA) and buy NAB, noting that if it can deliver earnings per share growth equivalent to its peers it should outperform.

Similarly, Morningstar recently upgrades its guidance on NAB to a price target of $38, as profit growth is expected to accelerate as funding costs decline. The analysis also liked the 5.5% fully franked yield and the potential for relatively strong dividend growth in coming years.

Foolish takeaway

All foolish investors will know that past performance is no guarantee of future success, or in this case, failure, and NAB has a number of catalysts which may result in outperformance of the stock after a long period of disappointment. Risk adverse investors may be inclined to pick up some NAB shares during any pullback in the Australian share market.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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