Five major companies that are bridging a gap between fundamental value and share price

It’s almost 25 years since Alan Greenspan coined the phrase “irrational exuberance” to warn of the potentially overvalued nature of some stocks in the mid-90’s, right before the dot-com bubble burst. As today’s world economy grapples with trading conditions incorporating a global pandemic, an ever-shifting geopolitical landscape and the growing perils of climate instability, is there irrational exuberance in share prices or is it really different this time?

Investors in 2021 seem to be focusing more on the vision and potential of a business than its “book” value. For example, money is pouring into equities such as Tesla, based on a belief that it will remain the lead innovator in the next-generation automobile market rather than based on traditional financial measures.

Global market analysts Plimsoll have a long history of valuing and analysing the financial stability of companies of all shapes and sizes and in the full spectrum of industries. We have picked out five global, publicly listed companies where divergence between intrinsic value based on traditional ratio analysis and the valuation afforded them by the latest share price is largest:

FORD MOTOR COMPANY

May 2020 to May 2021 stock price increase:        133% ↑

Plimsoll valuation year on year increase:               3% ↑             

After a much-disrupted period during the height of the pandemic, the share price of the US car giant Ford has followed that of other legacy car manufacturers like Volkswagen and Daimler in rebounding strongly over the last 12 months.

However, the fundamental value of the business remains relatively static, up only 3% according to Plimsoll’s latest valuation based on the 2020 full year accounts. What could be causing such a surge in share price when the fundamentals remain so flat? 

While traditional ICE-powered vehicles remain the largest part of the Ford range, plans to grow their EV business and the general belief in a sharp post-pandemic rebound in car demand has seen investors buying a bright future.

RIO TINTO PLC

May 2020 to May 2021 stock price increase:        75% ↑

Plimsoll valuation year on year increase:              20% ↑

The recent record increases in iron ore prices have supported massive gains in the share price of mining giant Rio Tinto Plc, and further highlighted the company’s reliance on the commodity.

In contrast, the increase in the fundamental, ratio-based valuation of the business, while a relatively healthy 20% up year on year, lags the 75% increase in share price.

Whether investors are buying into a vision that is risky and too short term is too early to forecast. Is Rio Tinto’s share price vulnerable to ore prices more than halving over the next four years or could demand from China increase further and keep them higher for much longer as the global economy rebounds strongly?

ALPHABET INC

May 2020 to May 2021 stock price increase:        72% ↑

Plimsoll valuation year on year increase:              19% ↑

Google’s parent is already seeing a post pandemic surge in revenue from advertising. As a modern-day bellwether for the health of the global economy, Alphabet has seen the fundamental value of the business grow 19% as e-commerce continues to overtake physical retail.

However, the share price has risen 72% over the same period. Investors seem to believe that the recent surge in search advertising revenue will carry on throughout the recovery and other revenue streams such as YouTube and cloud services will continue their recent explosive growth in the post-pandemic economy.

With little competition in the search or on-demand video eco-systems, Alphabet Inc appears to face the least risks to its elevated value and ability to deliver further increases in future.

DEUTSCHE POST AG

May 2020 to May 2021 stock price increase:        72% ↑

Plimsoll valuation year on year increase:              19% ↑

While the already declining volume of postal mail was further decimated by an almost total collapse in marketing mail during the pandemic, the international, cross border parcel business of the DHL division has delivered strong results in the latest year.

The almost total grounding of passenger air traffic has led to a sharp rise in air freight tariffs. The migration from bricks and mortar retail to e-commerce has seen the explosion in courier demand. Serving more than 100 countries around the world has seen the financial value of Deutsche Post AG rise by 19% year on year.

However, the share price has risen almost four times as quickly at 72%. Are investors certain that the gradual return of passenger air travel won’t drag down the cost of air freight over the next few years? Alternatively, are they confident that with increased stimulus, and a more international outlook in US politics, increased global trade will make up the difference and they are best placed to capitalise?

GENERAL ELECTRIC CO

May 2020 to May 2021 stock price increase:        113% ↑

Plimsoll valuation year on year increase:              8% ↑

The turnaround at GE under the guidance of Larry Culp has seen the fundamental value of the healthcare, aviation and power conglomerate continue to recover. The closing of troubled GE Capital and reduced debt has seen the value of the business strengthen.

However, the share price has followed suit at a far faster velocity. While the fundamental value of the group has rallied 8% under the CEO’s turnaround plan, investors have been enthused enough to drive the share price up 113% year on year.

Many investors seem keen to buy into the new streamlined group. With aviation demand looking set for a robust, multi-year recovery and continued excellent results from their healthcare division, investors appear to be buying into the future of GE.

These five examples are, of course, enormous companies. However, the principle of increasing the value of any business lies in selling a vision. What is the business going to be rather than what it is or has been previously? Bridging that gap between where a company currently sits and what it could be in the near to medium future is the secret to securing the best possible price for a company.

Plimsoll offers a range of services designed to help owners of all sizes to value their own business. We also help you look to the future and ensure when the time comes, your business and the time invested in it achieve the best possible price.

For more information on the services we offer, please click here.