Are CBA shares flying too close to the sun?

A woman sends a paper plane soaring into the sky at dusk.

A woman sends a paper plane soaring into the sky at dusk.

Commonwealth Bank of Australia (ASX: CBA) shares were on form again on Wednesday.

Australia’s largest bank’s shares ended the day 0.5% higher at $108.07.

This leaves the CBA share price trading within a whisker of a 52-week high of $108.39.

Can CBA shares keep rising?

Unfortunately, analysts at Goldman Sachs appear to believe that investors should be taking profit and selling CBA’s shares right now.

According to a recent note, the broker has reiterated its sell rating with a $90.98 price target.

This implies potential downside of 16% for investors over the next 12 months.

Why isn’t the broker a fan?

While Goldman Sachs believes CBA is a high quality bank, the broker just can’t get its head around its valuation.

There are three key reasons why its analysts don’t believe that CBA’s shares deserve to trade at such a premium to the rest of the big four. These include intense competition, its exposure to macro headwinds, and softer volume trends. Goldman explained:

While the 1Q23 update highlighted the strength of the CBA franchise (particularly deposits), reflected in its very strong NIM performance, we reiterate our Sell given: i) it does remain more exposed to the intense competition we are currently observing in mortgages (albeit CBA appears to be favouring NIM over volumes), ii) we expect that potential further macro downside is likely to more adversely impact the household this cycle, which CBA is more exposed to, and iii) domestic volume trends have tracked towards system levels.

The broker highlights that despite the above, its shares still trade at a 51% premium to the average forward price-to-earnings ratio (PER) of peers. This is more than double the historic average. Goldman concludes:

We therefore do not believe its fundamentals justify the 51% 12-mo fwd PER premium it is currently trading on versus peers, compared to the 20% historic average. With c.14% [now 16%] downside to our revised 12-month TP of A$90.98, maintain Sell.

The post Are CBA shares flying too close to the sun? appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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