The National Australia Bank Ltd (ASX: NAB) share price soared to new heights on Tuesday, up 2% and hitting $36.59 at the time of writing.
The last time it traded at this level was in April 2015, making today's mark the highest price NAB has exchanged hands in nine years.
Over the past 12 months, NAB shares have surged by 43%, marking a strong run for the bank's share price and catching the eye of investors. Here's a closer look.
What's driving the NAB share price rally?
The NAB share price has rallied hard in 2023/2024, potentially reflecting investor confidence in the bank's future prospects.
This is evidenced by the increase in the price-to-earnings ratio (P/E) from 15 times at the end of May to over 16 times at the time of writing. Investors are willing to pay more for every dollar of NAB's earnings.
Goldman Sachs maintains a neutral rating on NAB in a note from June, highlighting the bank's solid fundamentals, but noting its high valuations at the same time.
NAB's current P/E ratio of 16.4 is one of the highest it has been in the past 15 years, meaning "the stock's valuation is difficult to justify", according to Goldman.
But despite this, Goldman acknowledges NAB's strengths in small to medium enterprise (SME) exposures and its 8.5 million customer base.
Investors appear to agree and are looking past the higher-than-average P/E multiples in this latest rally.
Is now a good time to buy NAB shares?
Given NAB's current performance, the key question for investors is whether this is a good time to buy.
According to Goldman Sachs, the bank's fundamentals remain solid, but valuations on the NAB share price may be stretched.
The firm notes that NAB's recent growth could also pose a challenge in maintaining productivity gains in the future.
NAB is further through its productivity program than peers, and we believe it may become increasingly difficult to sustain its current pipeline of productivity benefits into outer years.
UBS rates the NAB share price a sell with a price target of $30. Although today's prices are well above this level, it's important to remember that investing is a long-term game and that things can change.
Meanwhile, according to CommSec, the consensus analyst rating on NAB is hold, and the distribution is two buys, nine holds, and six sells.
What are the risks?
While NAB's performance has been impressive, there are potential risks to consider. NAB's high P/E ratio might suggest that the stock may be nearing a fair value, which could limit further upside potential.
Paying too high a price for an investment – measured by the P/E ratio – is the anathema to intelligent value investing. The mathematics also show that, for a given set of investment options, and all else being equal, paying lower P/E ratios can bolster returns.
As the late Charlie Munger, Warren Buffett's right-hand man, famously said: "A great business at a fair price is superior to a fair business at a great price".
The challenge is in identifying what's "fair" and if that applies to the NAB share price right now. It appears the market thinks so.
Conclusion
The NAB share price reaching a nine-year high is a testament to investors' views on the bank and its fundamentals. While high valuations pose some concerns, time will tell if management has laid a solid foundation for future growth.
However, it's crucial to remain cautious and consider potential risks. Always remember to consider your own personal financial circumstances.
