Commonwealth Bank of Australia (ASX: CBA) shares have smashed the market over the past 12 months.
Over the period, Australia's largest bank's shares have risen a remarkable 40%.
Interestingly, this is despite almost every major broker stating their belief that its shares were overvalued a year ago.
Are CBA shares finally too expensive?
Goldman Sachs has been busy looking into the outperformance of CBA shares.
It believes this outperformance has been driven by two major factors. The broker estimates that less than one-third of this is due to fundamental drivers. It said:
A bit less than one-third of this outperformance can be put down to CBA's fundamental drivers, including: i) book value per share growth, which has outperformed peers by 4% cumulatively, ii) DPS (+3%), and iii) the relative P/B multiple implied by the relative change in franking-adjusted ROE (+8%), in turn due to CBA's superior franchise, and funding mix.
But the key reason for the outperformance according to Goldman is the market pricing in a lower implied cost of equity. Though, it doesn't agree that this is justified. It explains:
However, the remaining outperformance can be put down to a relatively lower implied cost of equity vs. peers, which we estimate has fallen by 1% more than peers' over this period, to <7% currently; an outcome we find difficult to justify given the evolution of relative fundamentals, per our CAMEL framework.
Furthermore, the broader Australian market's cost of equity has been broadly unchanged over this period, while global comparable banking peers have actually increased by c. 1%.
Time to sell
In light of the above, the broker clearly doesn't believe that CBA shares deserve to have risen 40% over the past 12 months. As a result, this morning, its analysts reiterated their sell rating with an improved price target of $100.35.
Based on its current share price of $142.96, this implies a potential downside of 30% for investors over the next 12 months.
Goldman also highlights that even if cost of equity assumptions remain the same, the returns on offer will not justify buying CBA's shares today. Though, it doesn't expect that to be the case. It concludes:
Assuming cost of equity remains unchanged, our fundamental forecasts imply 4% 12m TSR for CBA, in line with peers. Our base case assumes a 2% rise in the cost of equity for both CBA and peers, which sees CBA underperform peers by 10% over the next 12 months.
If we assume CBA's cost of equity gap to peers closes to its average levels since 2002, then the underperformance will be more like 20%. Given the asymmetries in our scenario analysis (it's unlikely CBA's relative cost of equity falls further), we stay Sell.
