The above quote from Warren Buffett’s mentor Benjamin Graham notes the tendency for share prices to eventually reflect, there or thereabouts, a company’s underlying value.

In the short and medium term, though, situations will often arise where a company’s share price either lags behind or runs ahead of a reasonable estimate of the company’s value. The latter seems to be the case for two ASX companies that reported earnings this week.

Commonwealth Bank (CBA)

CBA’s first-half earnings release on Wednesday showed a solid start to fiscal 2025. Earnings were slightly higher than our analyst Nathan Zaia’s expected, with profits up 2% on the same period last year and 7% ahead of last year’s second half.

This was driven by mortgage growth, a fall in bad debt expenses and better net interest margins, which appear to have stabilised as competitors price loans less aggressively. Taken together, this more than offset higher than expected growth in costs.

Nathan increased his Fair Value estimate by 3% following the result and expects that CBA can continue to grow its loan book faster than the sector while improving its margins and cost profile. Although Nathan’s outlook for the company is positive, he continues to think the shares are materially overvalued.

Zaia feels that Commonwealth Bank’s strong competitive position justifies a premium valuation versus most other banks, but he thinks this has gone too f widened to an extreme level. CommBank’s price-to-earnings ratio of over 25 and price to book ratio of 3.5 times look especially expensive versus other major banks, even those with Wide Moat ratings.

Figure 1: CBA's pricey price-to-book ratio. Source: Morningstar Direct

Zaia thinks CBA shares have a Fair Value of $98 compared to a price of $165.98 at Wednesday’s close. As a result of this sizeable gap, the shares currently sport a one-star Morningstar rating.

Commonwealth Bank

  • Economic moat rating: Wide
  • Fair Value estimate: $98 per share
  • Share price February 12: $166
  • Star rating: One star

Breville (BRG)

Breville reported 11% higher operating earnings than the same half last year, boosted by double-digit sales growth in its coffee machine segment. Simply put, Breville’s impressive foothold in the US and Europe continued to bear fruit.

Breville’s appliances have captured a premium position in these markets, which is reflected by its ability to charge premium prices along with other high-end brands like De’Longhi and KitchenAid. This brand strength underpins Angus Hewitt’s Narrow Moat rating for the company.

At current prices, though, Angus thinks the market is overly optimistic that Breville’s strong recent growth can continue for several years. Geographic expansion is the key here but Angus isn’t sure that new markets like China and the Middle East will be quite as lucrative as the US and Europe have proven.

Nonetheless, he expects further inroads in the Europe and the US to underpin solid revenue growth of around 7% per year for the next five years, while improved margins could see operating earnings grow at a 10% yearly clip.

Figure 2: Breville revenue by fiscal year. Source: Pitchbook

Angus’s $21 Fair Value estimate for the shares is some 40% lower than the current share price of around $37, suggesting that markets are pricing in Angus’s growth expectations and a whole lot more. Breville currently boasts a one-star rating.

Breville

  • Economic moat rating: Narrow
  • Fair Value estimate: $21 per share
  • Share price February 12: $37
  • Star rating: One star

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar's Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company's stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.