Since the turn of the year, the share price performance of Commonwealth Bank of Australia (ASX: CBA) has been somewhat disappointing, with its valuation falling by 1.5% versus a gain of 3.5% for the ASX. Clearly, doubts surrounding the performance of the wider economy are a key reason, as well as concerns among some investors regarding the valuation of the wider banking sector.
Meanwhile, specialist lender, FlexiGroup Limited (ASX: FXL), has seen its share price soar by 13% year-to-date and, looking ahead, I believe that it will continue to outperform CBA over the medium term for these three reasons.
Better value
Although CBA trades at a discount to the ASX, its rating is higher than that of the wider banking sector. In fact, CBA has a price to earnings (P/E) ratio of 15.1 which, while lower than the ASX's P/E ratio of 16.4, is still higher than the 13.5 of the banking sector. Furthermore, CBA's earnings growth prospects over the next couple of years are unlikely to act as a positive catalyst on the bank's share price, with the CBA's bottom line set to rise at an annualised rate of 4.9% over the next two financial years.
Meanwhile, FlexiGroup trades on a P/E ratio of just 11.4 and, while it offers less size and scale than CBA, it does have much better growth prospects. For example, FlexiGroup is expected to post earnings growth of 9.4% per annum over the next two years, which puts its shares on a price to earnings growth (PEG) ratio of just 1.21, versus 3.07 for CBA.
Better income prospects
While CBA remains an appealing income play due to it having a yield of 4.9%, FlexiGroup offers a higher yield, better dividend growth prospects and a more sustainable payout ratio. For example, FlexiGroup yields 5% and is expected to increase dividends per share at an annualised rate of 7.8% (versus 4.5% for CBA) over the next two years.
And, perhaps most importantly, FlexiGroup's dividends appear to be sustainable and offer greater scope for increases at a faster pace than earnings growth over the medium term, since FlexiGroup has a dividend payout ratio of 58% versus 75% for CBA.
Greater capital gain potential
Clearly, both companies are likely to benefit from a lower interest rate in terms of it increasing demand for new loans and also reducing defaults on existing loans, as the cost of servicing debt becomes lower.
However, FlexiGroup looks set to benefit from an increasingly loose monetary policy to a greater extent than CBA, since it has a beta of 1.35 versus 0.79 for CBA. This means that if falling interest rates have a positive impact on the price level of the ASX, then FlexiGroup's shares should react by moving upwards by 1.35% for every 1% rise in the ASX, versus a 0.79% rise for CBA in the same scenario.
Certainly, FlexiGroup may be more volatile as a result of its higher beta but, when combined with its superior income prospects, higher growth rate and lower valuation, it appears to be a better buy than CBA at the present time.
