Around two years ago, I looked at Metro Bank (LSE: MTRO) and said I thought it was “well worth keeping an eye on with a view to buying the shares on any future weakness.”
Back then it looked like the challenger bank was attracting customers and winning market share in the UK. The firm was producing some decent growth numbers but the stock market was well up with events and the valuation looked “heady” with the forward-looking price-to-earnings (P/E) ratio running near 50.
Share-price collapse
Well, I certainly got my share-price weakness. At today’s 523p, the stock is down more than 85% from 3,611p at the time of my article two years ago. But now the ‘opportunity’ is here, I’m more cautious than ever about the firm.
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For a long time, Metro kept pumping out tasty growth numbers with its financial reports and the language of the directors came across to me as exuberantly upbeat. But arguably, the first cracks in the tone of the message from the bank came early this year within the full-year results report for 2018 with chief executive Craig Donaldson reporting a “strong” set of results “despite an uncertain and challenging environment.”
The bank also announced it had agreed a standby underwrite agreement with RBC Capital Markets, Jefferies and KBW for an equity raising event of around £350m after an accounting error emerged, which left its balance sheet looking weak.
Needless to say, the share price plunged hard and fast, and it had been sinking for around a year before that. Indeed, the company had already been back to the stock market to raise around £300m as recently as July 2018.
Could there be trouble ahead?
Then in May, Donaldson said in the first-quarter report, “this quarter has been challenging.” There was no mistaking the change in tone by then, and the bank followed up by carrying out the previously flagged placing at a price of 500p per placing share, raising a gross £375m.
I think the performance of the share price underlines the risks of paying too much for a growth story. If an underlying business goes on to perform well, we can still end up with a poor investment outcome if valuations ‘correct’. But what about now? Are Metro shares worth buying today?
One thing that bothers me is Metro’s apparent hunger for cash. Another thing is the inherent cyclicality of the underlying business. I’ve been bearish on the major bank shares for a long time because I think a downturn in profits could arrive at any time. Previously, I believed Metro was growing so fast it might be worth considering differently.
However, now I feel the firm is just as prone to making operational gaffs as the established firms it’s challenging. The valuation remains high too, with the forward-looking P/E ratio running near 22 for 2020. I’m avoiding the shares.
