EVE Investments Limited (ASX:EVE), a AUD$5.93M small-cap, operates in the capital markets industry, which has recently been facing serious existential threats resulting from potential disintermediation and disruption from new technology. Many banks and capital markets firms, particularly the large, complex institutions, have been simplifying their business and operating models over the last few years, both for economic reasons and to reduce organizational complexity. Financial services analysts are forecasting for the entire industry, a strong double-digit growth of 15.83% in the upcoming year, and an enormous growth of 33.51% over the next couple of years. However this rate still came in below the growth rate of the Australian stock market as a whole. Is the capital markets industry an attractive sector-play right now? Below, I will examine the sector growth prospects, as well as evaluate whether EVE is lagging or leading its competitors in the industry. Check out our latest analysis for EVE Investments
What’s the catalyst for EVE’s sector growth?
The threat of disintermediation in the capital markets industry is both real and imminent, taking profits away from traditional incumbent financial institutions. Over the past year, the industry saw negative growth of -7.60%, underperforming the Australian market growth of 562.28%. EVE leads the pack with its impressive earnings growth of 11.12% over the past year. This proven growth may make EVE a more expensive stock relative to its peers.
Is EVE and the sector relatively cheap?
The capital markets industry is trading at a PE ratio of 22x, above the broader Australian stock market PE of 16x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry returned a lower 8.70% compared to the market’s 12.00%, which may be indicative of past headwinds. Since EVE’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge EVE’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? EVE recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto EVE as part of your portfolio. However, if you’re relatively concentrated in capital markets, you may want to value EVE based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If EVE has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the capital markets industry. However, before you make a decision on the stock, I suggest you look at EVE’s future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.
For a deeper dive into EVE Investments’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other financial stocks instead? Use our free playform to see my list of over 600 other financial companies trading on the market.
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