Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) to ascertain if its share price can return to 6,885p.
Initial catalyst
Of course, before we can establish whether or not RBS can return to its all-time high of 6,885p, we need to figure out what caused it to reach this level in the first place.
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In the case of RBS, it would appear that the share price reached this all-time high during the first few months of 2007, after a period of explosive earnings growth. In addition, the banks share price was carried to this high in the general market euphoria preceding the financial crisis.
Still, during 2007 investors were prepared to pay a premium for RBS’ shares as the banks profit had grown approximately 400% in the short space of five years and many believed that this would continue.
However, we are all well aware of what happened next to RBS, and after six years, a government bailout and tens of billions in losses, the banks shares now sit a full 95% below their 2007 peak.
But can RBS return to its former glory?
With these horrendous losses, many investors will be questioning whether or not their holdings will ever return to their 2007 peak. Unfortunately, it does not look as if this will ever be possible.
Indeed, the stringent requirements placed on RBS in return for receiving a government bailout have meant that the bank is now a fraction of the size that it used to be. What’s more, the company was forced to issue millions of additional shares in return for its bailout.
With billions of additional share in issue, RBS will have to work extra hard to achieve earnings per share similar to the level achieved back during 2007.
Actually, if we try and figure it out, RBS would have to achieve earnings per share of 344p and trade at a P/E of 20 to justify a share price of 6,885p. City estimates currently predict that RBS will earn 26p per share during 2014 on profits of £3.5 billion, implying that RBS will have to earn a staggering £46 billion in profit per year to justify a return to 6,885p.
Foolish summary
So all in all, after its bailouts and restructuring, RBS now looks as if it will never be able to return to its all-time high of 6,885p.
