Is Royal Bank of Scotland Undervalued?

With shares of Royal Bank of Scotland (NYSE:RBS) trading around $10, is Royal Bank of Scotland an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Royal Bank of Scotland is a global banking and financial services group that operates in the United Kingdom, the United States, and internationally through its two principal subsidiaries: The Royal Bank of Scotland and National Westminster Bank. In the United States, the subsidiary of the Royal Bank of Scotland, Citizens Financial Group, is a commercial banking organization. The company includes business segments of UK Retail, UK Corporate, Wealth, Global Transaction Services, Ulster Bank, US Retail & Commercial, Global Banking & Markets, RBS Insurance, Central items, and Non-Core Division and Business Services.

Royal Bank of Scotland has recently named Ross McEwan as its new CEO. McEwan will replace Stephen Hester on October 1, as the bank continues to face pressure to downsize from the British government. The government is pushing RBS to consider breaking up as it attempts to get back some of the 45.5 billion pounds it spent on the bank’s bailout. The bank presented a lackluster earnings report with profit at RBS’s core businesses falling 17 percent.

T = Technicals on the Stock Chart are Strong

Royal Bank of Scotland stock whipsawed back and forth for most of the year. The stock is currently trading about 10 percent below highs for the year. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Royal Bank of Scotland is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

RBS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Royal Bank of Scotland options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Royal Bank of Scotland Options

33.95%

26%

25%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Royal Bank of Scotland’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Royal Bank of Scotland look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

126.20%

123.48%

-47.56%

-216.31%

Revenue Growth (Y-O-Y)

11.14%

22.85%

61.81%

-41.14%

Earnings Reaction

-2.16%

-0.38%

0.00%

1.17%

Royal Bank of Scotland has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Royal Bank of Scotland’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Royal Bank of Scotland stock done relative to its peers, Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and sector?

Royal Bank of Scotland

Bank of America

JPMorgan Chase

Citigroup

Sector

Year-to-Date Return

-1.25%

23.08%

18.54%

26.19%

15.96%

Royal Bank of Scotland has been a poor relative performer, year-to-date.

Conclusion

Royal Bank of Scotland is a provider of financial services to consumers and companies around the world. The company has recently appointed a new CEO who may offer positive change. The stock has been fairly volatile for most of the year and is currently about 10 percent from yearly highs. Over the last four quarters, earnings have been mixed while revenues have been rising which has led to mixed feelings among investors in the company. Relative to its peers and sector, Royal Bank of Scotland has been a poor year-to-date performer. WAIT AND SEE what Royal Bank of Scotland does this coming quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.