Should You Invest In The Financial Stock Mercantile Investment Company Limited (ASX:MVT)? – Simply Wall St News
Mercantile Investment Company Limited (ASX:MVT), a AUDA$47.60M small-cap, operates in the capital markets industry, which now face the choice of either being disintermediated or proactively disrupting their own business models to thrive in the future. 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 relatively muted growth of 6.82% in the upcoming year , and a whopping growth of 41.90% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. An interesting question to explore is whether we can we benefit from entering into the capital markets sector right now. Today, I will analyse the industry outlook, and also determine whether Mercantile Investment is a laggard or leader relative to its financial sector peers. View our latest analysis for Mercantile Investment
What’s the catalyst for Mercantile Investment’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 growth of 3.16%, though still underperforming the wider Australian stock market. Mercantile Investment lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its capital markets peers. As the company trails the rest of the industry in terms of growth, Mercantile Investment may also be a cheaper stock relative to its peers.
Is Mercantile Investment and the sector relatively cheap?
Capital markets companies are typically trading at a PE of 22x, in-line with the Australian stock market PE of 18x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 8.68% compared to the market’s 11.86%, potentially indicative of past headwinds. Since Mercantile Investment’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Mercantile Investment’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Mercantile Investment has been a capital markets industry laggard in the past year. If your initial investment thesis is around the growth prospects of Mercantile Investment, there are other capital markets companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Mercantile Investment fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If Mercantile Investment has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its capital markets peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at Mercantile Investment’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Mercantile Investment’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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