What if CBA rallied another 40%?

Everyone is talking about Commonwealth Bank's (ASX: CBA) gravity defying share price, which has surged over 40% in the past twelve months.

The stock now trades at a record-high PE ratio of 27 — far above its long-term average of around 15. Its soaring valuation has also lifted the price-to-book ratio to roughly 3.5, meaning the company’s market cap is more than three times its book value.

No matter how you slice it, CBA is expensive relative to historical averages and traditional valuation metrics. Yet, over the past year, the bank has delivered only two certainties: Consistent results and a rising share price.

To have a bit of fun – what would CBA’s valuation look like if the stock surged another 40%?

CBA critics and latest results

One reason CBA's valuation is controversial is that a vast majority of brokers have had a 'Sell' rating on the stock for the past two to three years. They continue to maintain sell ratings, with target prices ranging from $90 to $120.

Meanwhile, institutional players are also underweight for the same valuation concerns. But holding fewer CBA shares has caused many funds to underperform the benchmark S&P/ASX 200 Index.

But the latest set of results for the half-year ended 31 December 2024 highlighted a clean set of numbers that beat market expectations, including:

• Cash NPAT up 2% to $5.13 billion vs. $5.05 billion consensus (1.6% beat)

• Interim dividend up 5% to $2.25 per share vs. $2.22 consensus (1.4% beat)

• Net interest margin up 2 bps to 2.08% vs. 2.04% consensus (1.9% beat)

• Operating expenses up 6% to $6.37 billion

• Loan impairment expenses down 23% to $320 million

Another 40% Would Mean ...

If CBA were to rally another 40%, it would trade at around $220 a piece, which implies a PE ratio of 38 and a price-to-book ratio just shy of 5.

While analysts' price targets have missed the mark, their forecasts are generally quite accurate. Here's what Macquarie expects over the next couple of years.

Source: Macquarie | January 2025

Even if CBA were to rise 40% over the next three years, its valuation would still expand to 38x due to a lack of earnings growth. Even with a slight acceleration in earnings, its PE ratio would still trade with a three handle (again, assuming a 40% share price rally).

At $220 per share and a forecasted dividend of around 480 cents per share, CBA would yield just 2.1%.

This combination of sluggish earnings growth and a stretched valuation explains the bearish sentiment on the stock, especially given that peers like Westpac, ANZ, and NAB trade at more reasonable PE ratios of 14-17.

Despite CBA's consistent earnings and margins, cracks are beginning to show. Recent updates from peers like Bendigo Bank, Westpac, and NAB have all reported weaker-than-expected margins and ongoing cost pressures. This either signals a broader headwind for the banking sector or reinforces CBA’s status as the highest-quality bank.

At that price ...

At a 38x PE, this would make CBA as expensive as some of the following names:

• Breville Group (40x)

• Codan (38x)

• Aristocrat Leisure (38x)

• Wesfarmers (34x)

If you look at a name like Breville – Citi analysts expect Breville’s earnings to grow at a compound annual rate of 12.5% over the next three years. The kitchen appliance maker is also expanding into new markets, recently entering China and the Middle East.

Meanwhile, Wesfarmers may look expensive at 34x earnings, but Goldman Sachs and UBS recently upgraded the stock to a buy, citing expectations of an accelerated earnings CAGR of ~10% between FY24-27.

While both companies are trading at historically high valuations, they at least have growth prospects ahead.

Despite all this, CBA continues to stand tall, with only an exogenous event likely to shake it. Even when hit by negative catalysts — such as poor earnings from peers, the unwinding of the yen carry trade, or Powell’s dovish comments in December — CBA shares have dipped, only to V-shape its way back to prior levels.

Perhaps we’re in a market where excessive passive inflows and inelastic demand leave little room for anything but upward momentum.