WAL Stock Study (4-12-23)
Posted by Mark on April 28, 2023 at 06:33 | Last modified: July 3, 2023 10:16I recently did a stock study on Western Alliance Bancorp (WAL) with a closing price of $31.84.
M* writes:
> Western Alliance Bancorporation is a Las Vegas-based holding
> company with regional banks operating in Nevada, Arizona, and
> California. The bank offers retail banking services and focuses
> on mortgages for retail customers and commercial loans, mainly
> for real estate. The bank also has an investment advisory
> business that manages investment portfolios for Western clients
> and clients of other banks.
I initially studied this stock on 3/15/23. I decided to do the 4/12/23 update with a new Value Line report just published.
Over the last 10 years, this medium-sized bank has grown assets and EPS 24.1% and 24.5% per year, respectively. Lines are mostly up, straight, and parallel (including total assets and sales). PTPM has trended up from 41.2% in ’13 to 57.3% in ’22 with a last-5-year average of 56.3%. This leads peer and industry averages.
ROE has trended up from 16.8% in ’13 to 21.0% in ’22 with a last-5-year average of 18.4%. This also leads peer and industry averages. Debt-to-Capital went from 30.9% in ’13 to 15.7% in ’20 before increasing to 55.7% in ’22. This was lower than peer and industry averages until two years ago. The last-5-year average is 26.2%. Value Line gives a B++ Financial Strength rating.
ROAA has increased from 1.34% in ’13 to 1.69% in ’22 with a last-5-year average of 1.85%. This is outstanding and has been above 1.50% every year since ’15.
The historical picture is completely unchanged since the 3/15/23 stock study. Looking forward is where things get murky.
In the first study, I went with a conservative 10% long-term sales growth forecast based on the following:
- CNN Business projects 15.4% YOY and 12.7% per year for ’23 and ’22-’24, respectively (based on 13 analysts).
- YF projects YOY 17% and 8.4% for ’23 and ’24, respectively (10 analysts).
- Zacks projects YOY 14.8% and 8.6% for ’23 and ’24, respectively (6).
- CFRA projects growth of 17.6% YOY and 12.8% per year for ’23 and ’22-’24, respectively (7).
- M* gives an ACE of 19.6% per year for the next two years.
>
On 4/12/23, we have:
- CNN Business projects 3.8% YOY and 5.6% per year for ’23 and ’22-’24, respectively (based on 15 analysts).
- YF projects YOY 8.2% and 6.0% for ’23 and ’24, respectively (12 analysts).
- Zacks projects YOY 5.3% and 6.8% for ’23 and ’24, respectively (6).
- CFRA projects growth of 10.5% YOY and 8.1% per year for ’23 and ’22-’24, respectively (7).
- M* gives an ACE of 18.7% per year for the next two years.
>
That’s some kind of haircut. I am now forecasting 5%—near the bottom of the range especially without a good explanation for why the analysts’ estimates have changed so drastically. I suspect a higher level of analyst uncertainty, and the more uncertain the estimates the more conservative my forecast should probably be.
One estimate that did not change much is M*. This confuses me because they’re all ACE as opposed to single-analyst projections. I would not think anything should be substantially different between M*’s batch of surveyed analysts and batches from other sources. The numbers indicate otherwise.
With regard to long-term EPS growth, I went with a 10% forecast in the original 3/15/23 study based on the following:
- CNN Business projects 6.9% YOY and 8.7% per year for ’23 and ’22-’24, respectively (based on 13 analysts), along with a 5-year annualized growth of 11.1%.
- MarketWatch projects 5% and 5.7% per year for ’22-’24 and ’22-’25, respectively (13 analysts).
- Nasdaq.com projects 10.7% YOY for ’24 (9).
- Seeking Alpha projects 4-year annualized growth of 11.1%.
- YF projects YOY 6.3% and 10.6% for ’23 and ’24, respectively (8), along with 5-year annualized growth of 12%.
- Zacks projects YOY 6.6% and 10.7% for ’23 and ’24, respectively (9) along with 5-year annualized growth of 10.1%.
- Value Line projects 9.5% annualized from ’21 to ’23/’24 and offers a 5-year-annualized ACE of 10.8% (9).
- CFRA projects growth of 6.1% YOY and 8.3% per year for ’23 and ’22-’24, respectively (11).
>
10% was less than the narrow range of five long-term estimates (mean 11%).
Here’s what we have today:
- CNN Business projects contraction of 15.4% YOY and 4.5% per year for ’23 and ’22-’24, respectively (based on 15 analysts), along with 5-year annualized contraction of 0.7%.
- MarketWatch projects 4.5% contraction per year and 0.7% growth per year for ’22-’24 and ’22-’25, respectively (15 analysts).
- Nasdaq.com projects 14.9% YOY growth for ’24 (9).
- Seeking Alpha projects 4-year annualized contraction of 0.7%.
- YF projects YOY 16.4% contraction and 7.5% growth for ’23 and ’24, respectively (14), along with 5-year annualized contraction of 13.3%.
- Zacks projects YOY 15.2% contraction and 15.0% growth for ’23 and ’24, respectively (9) along with 5-year annualized growth of 10.1%.
- Value Line projects 4.1% annualized growth from ’22-’24 and offers a 5-year-annualized ACE of 10.2% (9).
- CFRA projects contraction of 13.5% YOY and 3.9% per year for ’23 and ’22-’24, respectively (12).
>
It literally feels like someone swung a sledgehammer as hard as they could and decimated the bank vault. Silicon Valley Bank (Santa Clara, CA) failed on 3/10/23 and Signature Bank (New York, NY) failed on 3/12/23. That’s it since 2020 per fdic.gov. Perhaps this is how analysts adjust for more perceived risk in the industry even though I am aware of nothing drastic changing recently on a macroeconomic level (e.g. big changes in inflation, GDP growth, jobs, wages, housing, interest rates, etc.).
The mean of five long-term estimates (not including Value Line’s 4.1%) is now 1.1% with a range -13.3% to +10.2%. I have done stock studies where the high and low estimates both seem equally unreasonable and therefore discarded both. Here, 10.2% seems like one of the most reasonable estimates because it is little changed from a month ago. The Zacks estimate is entirely unchanged. On the flipside, YF (Refinitiv) went from +12.0% to -13.3%: a mindboggling reversal. They also added ~6 analysts/ratings [when this differs by 1-2 in consecutive years, I report the lower].
Rather than excluding the YF estimate altogether (resulting in a modified mean estimate of 4.7%), I will change it to -0.7% (matches long-term estimates from Factset and S&P Global) to get a modified mean estimate of 3.6%. My forecast is just below the mean at 3%, which is aggressive by my standards as I usually try to target lower in the range if not below it.
My Forecast High P/E is 11. In the original study, I wrote:
> From ’13-’22, high P/E has gone from 18.7 to 12.9 with a
> last-5-year average of 13.4. I am just below the entire
> range (lowest was 11.9 in ’19).
I see no reason to change this. What is different is the current P/E of 3.3, but I expect a return closer to the historical range over the next five years.
My Forecast Low P/E is 1. Again, I see no reason to change the original analysis:
> From ’13-’22, low P/E has gone from 8.2 to 5.7 with a last-
> 5-year average of 6.7 (lowest was 4.1 in ’20). These are
> very uncertain times for banks, however, with two banks
> failing in the past week. I am forecasting lower than
> usual in order to extend to the bottom of this range.
My Low Stock Price Forecast (LSPF) is the default value of $9.70. This is 69.5% below the previous close and 29.3% above the 52-week low of $7.50 seen the week before my original study.
Short of failing and having to shudder its doors, it seems like the 52-week low price will not be revisited anytime soon.
Western Alliance started paying a dividend in ’19 with an average Payout Ratio of 14.7% since. I am forecasting below the range (10.3% – 19.8%) at 9%.
These inputs land WAL in the BUY zone with an U/D ratio of 4.1. Total annualized return is 32.0%.
One month ago, U/D was 6.7 and total annualized return 41.4%. These numbers have fallen due to the lower forecasts.
In the original SSG, I continued:
> I assess the study margin of safety (MOS) by comparing
> my inputs with Member Sentiment (MS). Out of 453 studies
> over the past 90 days (my own excluded), projected sales
> growth, projected EPS growth, Forecast High P/E, Forecast
> Low P/E, and Payout Ratio average 15.4%, 12.8%, 12.9,
> 7.3, and 12.6%, respectively. I’m lower across the board.
> I can certainly give a pass to MS for Forecast Low P/E,
> which I certainly would not have decreased as much had
> it not been for events in the past week.
>
> As it stands, I believe the MOS here to be robust. While
> the 41.4% seems quite achievable, even PAR (based on
> Forecast Average, not High, P/E) at 26.1% would be more
> than acceptable.
Flashing forward to today, we have the following [thanks to Suzi (et. al?) for the updated MS functionality! It truly makes the process so much easier]:
Based on 377 studies done in the past 90 days (my study along with 133 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 15.0%, 12.4%, 11.7, 6.5, and 14.2% [it should be interesting to see if these come down over time]. I am much lower across the board. A robust MOS appears to back this study.
With regard to other data, MS high and low EPS are $17.25/share and $9.41/share compared to my $11.24 and $9.70. My low EPS may be lower due to recent quarterly growth while my high EPS is lower due to a lower forecast EPS growth rate. MS has a LSPF of $42.70: invalid at the present time. Just for my interest, the default LSPF of $9.41 * 6.5 = $61.17, which is 43% higher than that actually used.
Again, while 32.0% seems totally achievable from this beaten down stock price, even PAR of 17.7% would be outstanding.
This has been quite the interesting stock study, to be sure!
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