Is Sun Life Financial (TSX:SLF) Pricing In Its Recent Pullback Or Long Term Growth Prospects
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Wondering if Sun Life Financial at around $86.15 is offering good value today, or if the easy gains are already behind it? This article is here to help you make sense of the current price tag.
The stock has had a mixed run recently, with a 2.2% decline over both the last 7 days and 30 days, while still showing a 13.0% return over 1 year and 62.0% over 3 years.
Recent coverage has focused on Sun Life Financial’s position as a major Canadian insurer and wealth manager, and how investors may be reassessing risk and return for financial stocks more broadly. That backdrop helps frame the recent pullback against the longer term share price performance you are seeing.
On our checklist of 6 valuation tests, Sun Life Financial scores 3 out of 6, as shown by its valuation score. Next, we will look at how different valuation methods assess the stock today, and then finish with a way to put those numbers into a clearer, big picture view.
The Excess Returns model looks at how much profit a company can generate above the return that shareholders typically require, based on its equity. In simple terms, it asks whether Sun Life Financial is earning enough on its equity base to justify a higher share price.
For Sun Life Financial, book value is CA$41.51 per share, with a stable book value estimate of CA$47.67 per share, based on future book value estimates from 8 analysts. Stable EPS is CA$8.85 per share, sourced from weighted future return on equity estimates from 6 analysts. That implies an average return on equity of 18.57%.
The model applies a cost of equity of CA$2.98 per share. The difference between this and the stable EPS gives an excess return of CA$5.87 per share. When those excess returns are projected and capitalised, the Excess Returns model produces an intrinsic value of about CA$221.14 per share.
Compared with the recent share price around CA$86.15, this implies the stock is about 61.0% undervalued on this approach.
For a profitable company like Sun Life Financial, the P/E ratio is a straightforward way to link what you pay for the stock to the earnings it currently generates. It helps you see how many years of current earnings you are effectively paying for at today’s share price.
What counts as a “normal” or “fair” P/E depends on how the market views a company’s growth potential and risk. Higher expected growth or lower perceived risk can support a higher P/E, while slower growth or higher risk usually leads to a lower one.
Sun Life Financial currently trades on a P/E of 13.74x. That is close to the Insurance industry average of 11.61x and also in line with the peer group average of 13.84x. Simply Wall St’s Fair Ratio for Sun Life Financial is 13.59x. This is a proprietary metric that estimates an appropriate P/E given factors such as earnings growth, profit margins, industry, market cap and company specific risks. Because it adjusts for these company specific features, it can be more tailored than a simple comparison with peers or the sector.
With the current P/E of 13.74x sitting close to the Fair Ratio of 13.59x, the stock appears to be priced about in line with these fundamentals.
Earlier we mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you spell out your story for Sun Life Financial, link that story to a full forecast for revenue, earnings and margins, and arrive at your own fair value that you can compare with the current price. Because Narratives on the Community page are updated when new information like earnings or buyback news comes in, you can see, for example, how one investor might build a Narrative around analysts expecting revenue growth of 13.0% a year, earnings of CA$4.5b by 2028 and a fair value near the higher analyst target of CA$95.0. Another investor might focus on risks to margins, U.S. Dental headwinds and goodwill impairments to support a fair value closer to the lower CA$74.0 target. This gives you a clear, side by side view of how different assumptions lead to different conclusions about whether the stock looks expensive or attractive at today’s price.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include SLF.TO.
