Is the Westpac Banking Corp (ASX: WBC) share price a buy?

The Westpac share price has risen by 12.3% over the past two weeks. Not bad for a business that a lot of investors are counting out.

I suppose the market is simply saying that the Westpac’s troubles won’t be quite as bad as previously expected.

The Westpac share price is still down 40% compared to where it was before. That’s a large decline. There have been quite a few leadership changes within Westpac recently. Hopefully that’s a positive sign of renewal rather than anything else.

It’s not too surprising that the Westpac share price has dropped so hard. The recent Westpac FY20 half-year result outlined a number of the issues.

The statutory profit dropped 62% to $1.19 billion and cash earnings were down 70% to $993 million. When you exclude notable items, cash profit was still down 44%.

A significant part of the decline came about from higher impairment charges due to COVID-19. Westpac’s provisions for expected credit losses increased to $5.8 billion which included $1.6 billion of additional impairment charges predominately related to COVID-19 impacts.

Another problem that Westpac provisioned for is the upcoming AUSTRAC penalty. The bank has provisioned $900 million. Some don’t think that’s a big enough number.

What will cause the Westpac share price to rise further?

The recent news that not as many people are on jobkeeper as previously expected was positive. That’s a good sign for the overall economy and it hopefully means there would be less bad debts for the bank. That’s seemingly what caused the Westpac share price to rise over the past fortnight.

But beyond that, investors are waiting for more signs of a recovery for the banking sector. We’re still quite early into this crisis. Australia has been fortunate compared to most places in the world when it comes to the spread of the coronavirus. It will take a while for the full effect of the restrictions to be felt economically across the country.

The rest of the world is still going through the pandemic, so there could be more economic pain to wash through the global economy. Westpac will also have to come to terms with the very low interest rate which may harm the net interest margin (NIM) for some time.

How long will it take the Westpac share price to return to above $25? It could take a very long time. But if Australia’s banking system is safer than expected, there could be a bit more value at the current level. I’m not making that bet yet though.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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Its larger rivals have been stealing the spotlight from the Vocus Group Ltd (ASX: VOC) share price. But this may be about to change this month.

This is the prediction by Morgan Stanley, which is tipping a re-rating in the telecom services group’s share price when management provides an update in June.

If that comes to pass, it will be Vocus’ turn to have its 15 minutes in the sunshine. Investors are preoccupied with the merger of TPG Telecom Ltd (ASX: TPM) and Vodafone Australia, and the impact of that on the Telstra Corporation Ltd (ASX: TLS) share price.

Debt and earnings update

The cloud hanging over Vocus is the state of its balance sheet. Management is scheduled to provide an update on the refinancing of its $1.1 billion debt facility before the end of the month.

Morgan Stanley believes it will use the opportunity to update the market on its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) guidance too.

Vocus reiterated its FY20 EBITDA forecast of between $359 million and $379 million back in February at its half year results announcement. This compares to the average broker estimate of $367 million.

“For perspective, the last time VOC refinanced their debt, in Apr 2018, VOC shares rallied +21% over the next three weeks (vs. XJO +4%), as the risk of an equity raising was reduced,” said Morgan Stanley.

XJO refers to the S&P/ASX 200 Index (Index:^AXJO).

Best outcome

There are three potential outcomes from the upcoming Vocus update, according to the broker. Firstly, Vocus will successfully refinance its debt and reaffirm its EBITDA guidance.

This will lift market confidence in both its financial health and FY21 outlook with consensus pencilling in a $388 million figure.

Two other scenarios

The second scenario sees debt refinanced but the EBITDA guidance lowered by 2.5% to the midpoint of management’s guidance. This outcome will provide certainty on the group’s balance sheet but slightly weaken confidence in its FY21 outlook.

Under the third scenario, Vocus will launch a capital raising and downgrade its EBITDA guidance by 5%. This will see shareholders diluted and consensus downgrading forecasts for the next financial year.

Re-rating opportunity

The first scenario is the most bullish one and Morgan Stanley believes the stock will jump 13% from yesterday’s closing price of $3.10 to $3.50.

The broker believes this is the most likely outcome because management made good progress in turning the business around since the last refinancing exercise two years ago and there’s less earnings risk given this is the last month of FY20.

If there was bad earnings news, one would think the company would have already announced it due to the continuous disclosure obligation.

Worst case doesn’t look so bad

But even under scenario two, the impact on the Vocus share price may not be as bad as you’d think. The broker thinks the stock could also climb higher to $3.30 a share as that puts it on a price-earnings multiple of 18 times.

In the last and most bearish scenario, the stock is tipped to fall to $2.55.

However, I would point out that ASX companies that have undertaken a capital raise in the midst of this COVID-19 pandemic have outperformed after the raise.

So even if Vocus goes cap in hand to shareholders and the share price falls, this could also prove to be a buying opportunity.

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Motley Fool contributor Brendon Lau owns shares of Telstra Limited and TPG Telecom Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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If you’re lucky enough to have $50,000 in a savings account and no immediate use for it, then I think you should consider investing it into the share market with a long term view.

This is because you could turn these funds into a life-changing sum thanks to a combination of time and compound interest.

How is this possible?

As of the end of 2019, the Australian share market had provided investors with an average annual return of 9.5% over the last 30 years.

While we may not have started 2020 in a positive fashion, I remain confident that the local share market will deliver a similar level of return over the next three decades.

If this proves to the case, then a $50,000 investment could grow materially over the period.

For example, if you were to invest the $50,000 into the share market and earn the same return, you would have ~$125,000 in 10 years, ~$310,000 in 20 years, and then ~$760,000 in 30 years. That’s all from just a single investment.

If you’re happy with this potential return, then you could simply look to invest in an exchange traded fund (ETF) that tracks the S&P/ASX 200 Index (ASX: XJO). The BetaShares Australia 200 ETF (ASX: A200) allows investors to do this.

Another option is the Vanguard Australian Shares Index ETF (ASX: VAS), which gives investors exposure to the 300 shares listed on the S&P/ASX 300 index.

What if you beat the market?

Now, imagine if you could outperform the share market by a small margin each year.

Instead of an average annual return of 9.5%, what would happen if you achieved a return of 11.5% per annum?

With this level of return, your $50,000 investment in 2020 would be worth ~$150,000 in 10 years, ~$440,000 in 20 years, and a massive ~$1.3 million in 30 years.

While beating the market is hard, it is possible. Shares like REA Group Limited (ASX: REA) and ResMed Inc. (ASX: RMD) have consistently beaten the market over the last 15 years and appear well-positioned to continue this trend over the next decade.

The key is identifying companies with strong business models, positive long term outlooks, and competitive advantages.

More reading

• 3 high quality ASX blue chip shares to buy in June
• 3 founder-led ASX shares to buy for strong long-term returns
• 3 investing secrets for success with ASX shares
• ASX 200 investor in your 40s? 3 shares to buy now
• I don’t normally buy ETFs, but I would buy these 2

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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