Central Securities Corp (AMEX:CET), a USD$635.56M small-cap, is a capital market firm operating in an industry, which now face the choice of either being disintermediated or proactively disrupting their own business models to thrive in the future. Many aspects of banking and capital markets are being attacked by new competitors, whose key advantage is a leaner and technology-enabled operating model, allowing them to scale at a faster rate and meet changing consumer needs. Financial services analysts are forecasting for the entire industry, a somewhat weaker growth of 8 percent in the upcoming year, and a whopping growth of 37 percent over the next couple of years. However this rate still came in below the growth rate of the US 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 CET is a laggard or leader relative to its financial sector peers. See our latest analysis for CET
What’s the catalyst for CET'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. In the past year, the industry delivered growth of over 50 percent, though still underperforming the wider US stock market. CET leads the pack with its impressive earnings growth of over 100 percent last year. This proven growth may make CET a more expensive stock relative to its peers.
Is CET and the sector relatively cheap?
Capital markets companies are typically trading at a PE of 18 times, below the broader US stock market PE of 27 times. This illustrates a somewhat under-priced sector compared to the rest of the market. Though, the industry did returned a lower 14 percent compared to the market’s 16 percent, which may explain the lower relative valuation. On the stock-level, CET is trading at a lower PE ratio of 4 times, making it cheaper than the average capital markets stock. In terms of returns, CET generated 24 percent in the past year, which is 11 percent over the capital markets sector.
What this means for you:
Are you a shareholder? CET recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. In addition to this, its PE is below its capital markets peers, suggesting it is also trading at a relatively cheaper price. Perhaps the market isn’t as bullish of the growth going forward. If your investment thesis of the company hasn’t changed, now may be the right time to accumulate more of CET, if you’re not already highly concentrated in the stock.
Are you a potential investor? If CET has been on your watchlist for a while, now may be the best time to enter into the stock. Its industry-beating growth delivered have not been fully accounted for in its shares given its lower PE ratio relative to its peers. But before you make the decision to buy, I recommend you also look at other important fundamentals such as the health of the company, and see whether there is a significant reason why the stock may be trading at a discount in the capital markets sector.
For a deeper dive into Central Securities'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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.