Recent commentary around 1st Source (SRCE) has focused on its dividend track record, expectations for earnings growth this fiscal year, and rising institutional ownership. These factors are shaping how investors view the stock.

The recent move in 1st Source’s share price to US$76.91 comes after a year where the share price return has picked up, with shorter term gains building on strong multi year total shareholder returns.

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With 1st Source trading at US$76.91 and sitting at a 38.28% discount to one intrinsic value estimate, while only about 3.6% below one analyst target, should you see upside here or assume the market is already pricing in future growth?

Preferred P/E of 11.6x: Is it justified?

On a simple earnings yardstick, 1st Source trades on a P/E of 11.6x, which sits slightly below the US Banks industry average while the share price is close to one analyst target.

The P/E ratio compares the current share price to earnings per share, so for a bank like 1st Source it gives a quick sense of how much investors are paying for each dollar of current earnings.

Here, the picture is mixed. Relative to the broader US Banks industry average of 11.9x, the 11.6x P/E suggests the stock is priced a touch lower than many peers. However, compared with an estimated fair P/E of 10.4x from the SWS fair ratio work, the current multiple sits above the level that model suggests the market could potentially move toward if expectations normalise.

That contrast is even clearer when set against a peer group average P/E of 16.3x. In that context, 1st Source trades on a meaningfully lower earnings multiple, which indicates that investors are not applying the same earnings premium they assign to similar stocks.

Result: Price-to-Earnings of 11.6x (ABOUT RIGHT)

However, the current 11.6x P/E for 1st Source could be pressured if revenue and net income growth of 5.7% and 3.1% do not continue, or if credit conditions tighten.

Another view on 1st Source’s value

While the 11.6x P/E hints that 1st Source is roughly in line with the wider US Banks sector, the SWS DCF model presents a different perspective. With an estimated future cash flow value of about $124.61 per share versus the current $76.91, the stock appears materially undervalued. Which signal do you treat as more important?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out 1st Source for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 45 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Given the mixed signals around 1st Source, does the current sentiment match your own view of the stock’s potential and risks? Take a closer look at what is driving optimism by reviewing the 3 key rewards

Looking for more investment ideas beyond 1st Source?

If you are weighing 1st Source against other options, it can pay to cast the net wider and see how different types of stocks fit your goals.

• Target income potential by reviewing companies that offer reliable payouts in the 8 dividend fortresses
• Spot opportunities with strong fundamentals that the market may be overlooking via the screener containing 19 high quality undiscovered gems
• Prioritise capital preservation by checking stocks that currently score well on stability in the 66 resilient stocks with low risk scores

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.