Credit Suisse Group AG (ADR) Earnings Show It Has Turned a Corner

CS stock - Credit Suisse Group AG (ADR) Earnings Show It Has Turned a Corner

Credit Suisse Group AG (ADR) (NYSE:CS) stock saw a massive move higher in Wednesday trading. The company reported not only a profit, but a much higher earnings number than was seen in the same quarter last year. Now CS has completed its restructuring and is set to reap the benefits of its new structure. With more stable revenue sources and the financial crisis of 2008 well behind the company, CS stock should find itself in a much stronger position for growth.

CS Earnings Now Set on a Growth Path

CS earnings came in at 649 million Swiss francs ($659.5 million, or 27 cents per share) in the first quarter. This figure represents a 16% increase from the net income level reported in the same period last year. Adjusted revenues of 5.64 billion Swiss francs ($5.73 billion) represent a 2.0% increase from the same quarter last year.

This also looks to be the end of a three-year period of sustained losses brought about by restructuring. I stated after the last earnings report (where CS reported a net loss) that management positioned CS stock for a turnaround. Due to the general drop-off in the market, the stock now trades at a forward price-to-earnings (PE) ratio of about 12.4. Analysts expect Credit Suisse earnings for fiscal 2019 to rise by nearly 50%. Hence, the stock trades at a single-digit PE based on 2019 earnings. This will place the PE near historic lows. Traders responded positively in Wednesday trading. The CS stock price rose by more than 4.5% following the report.

Since taking over three years ago, CEO Tidjane Thiam has changed the focus of the venerable Swiss investment bank. Thiam has cut costs and focused the firm on revenues it can control. This means that Thiam changed the focus of CS from markets to wealth management, which now makes up 80% of the firm’s profits. As a result, the company reported record inflows from wealth management fees in Q1. Profits have now reached the highest levels since Thiam took over.

CS Stock Appears Set to Return to Pre-Crisis Levels

The 2008 financial crisis and its aftermath have put CS through a long and pronounced downturn. All of these years later, the stock trades at a level more than 75% below its 2007 price. Unlike the largest bank in Switzerland, UBS Group AG (USA) (NYSE:UBS), Credit Suisse chose to engineer its recovery without government assistance.

While not accepting a government bailout may have given CS more control over its destiny, the recovery has proven costly. Revenues remain below 2008 levels. At about $16 per share, the CS stock price remains well below its 2007 high, which peaked above $77 per share. UBS and Deutsche Bank AG (USA) (NYSE:DB) also trade well below 2007 levels. This stands in contrast to American banks such as Citigroup Inc (NYSE:C), Goldman Sachs Group Inc (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM). These banks accepted the money and terms of the government bailout. Now, they trade closer to all-time highs.

Final Thoughts on CS Stock

Despite its slower recovery, CS stock has stabilized its revenue streams and the company now appears poised for growth. The latest earnings numbers show the company’s string of losses has likely ended. CS is now poised to reap the benefits of its new structure.

Under the direction set by Mr. Thiam, the company relies less on fickle trading preferences and now focuses on more stable wealth management fees to bolster revenues. As a result, free cash flows and stockholders’ equity have grown in size.

Now, with a return to profitability and net income growth returning, CS stock should be in a position to return to its pre-crisis highs.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


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