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A FTSE 100 stalwart shifting into a higher‑growth, higher‑return phase, NatWest (LSE: NWG) looks strikingly undervalued to me on a long‑term basis.
For investors willing to look beyond the usual 12‑month analyst targets and short‑term valuation multiples, the long‑range fundamentals tell a far more compelling story.
So, how high could the shares go?
Long term versus short term
As a long-term investor, I see 30 years as a standard investment cycle. This starts at around 20 years of age and ends with examining early retirement options at about 50.
Consequently, short-term price targets are of little use to me. Yet the commonly used analyst targets are almost always 12‑month snapshots shaped by short‑term catalysts, interest‑rate noise, and market psychology.
Similarly largely redundant for me are valuation multiples relative to other stocks — or worse, to an index average. On the former, these are either backward‑looking or only 12 months forward. They show how a stock compares to peers now, not what it is worth over the long‑term.
And comparing a single stock to an entire index is close to meaningless. An index multiple blends dozens of unrelated sectors with completely different risk profiles and structural valuations. So, it tells one nothing about whether an individual stock is genuinely cheap or expensive.
Is this stock a bargain?
I think the discounted cash flow (DCF) model produces a meaningful picture for long-term investors, such as myself. It captures the full multi‑year arc of a company’s earnings power, capital returns, and balance‑sheet strength.
By projecting cash flows across an entire investment cycle rather than a single year, it reveals what the business is genuinely worth — not just how the market feels today.
In NatWest’s case, my DCF modelling uses a 7.5% discount rate, a perpetual growth rate of 3%, and a stable return on equity of 14.4% based on consensus analyst forecasts.
Other DCF inputs may differ, which could produce higher or lower valuations.
But based on my figures, the DCF suggests NatWest shares are around 43% undervalued at their current £6.46 price. That implies a ‘fair value’ of £11.33.
This price‑to‑valuation gap is important because asset prices can trade towards their fair value over time.
Growth trajectory
A risk to NatWest’s earnings growth — the key long‑term share‑price driver — is a continued decline in interest rates. This would squeeze the margin it earns between deposits and loans.
However, its nine‑month 2025 period saw total income rising 13% year on year to £12.3bn. This was driven by a resilient net interest margin of 2.31% and healthy lending expansion.
Operating profit before tax climbed 23% to £5.8bn, while return on tangible equity (ROTE) reached 19.5%. This is well above its long‑term target of over 13%. Unlike return on equity, ROTE excludes intangible elements such as goodwill.
Overall, the bank’s guidance is for full‑year income of £16.3bn and ROTE above 18%. These results reinforce the strong long‑term cash flow trajectory underpinning my valuation model.
My investment view
Given its strong performance, steady high-quality returns, and deep discount to fair value, I will add to my current holding very soon.
I also believe the same combination of robust fundamentals and a wide valuation gap makes the shares worthy of other investors’ attention.
