WAL Stock Study (10-4-23)

Posted by Mark on December 1, 2023 at 06:47 | Last modified: October 4, 2023 11:25

I recently studied Western Alliance Bancorp (WAL) with a closing price of $41.90. Previous studies are here and here.

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.

Over the past decade, this medium-size bank has grown sales and EPS at annualized rates of 22.3% and 24.5%, respectively. Lines are mostly up, straight, and parallel (including total assets). PTPM leads peer and industry averages while trending up from 41.2% (’13) to 57.5% (’22) with a last-5-year mean of 56.6%.

Also over the past decade, ROE leads peer and industry averages while trending up from 16.8% (’13) to 21.0% (’22) with a last-5-year mean of 18.4%. Debt-to-Capital is lower than peer and industry averages despite increasing recently from 13.5% in ’19 to 55.7% in ’22 with a last-5-year mean of 26.2%.

Value Line rates the company B+ for Financial Strength.

ROAA increases from 1.36% in ’13 to 1.69% in ’22 with a last-5-year mean of 1.85%. This has been above 1.50% every year since ’15 until the current reading of 1.36%, which is a 10-year low.

With regard to sales growth:

• CNN Business projects 3.8% YOY and 3.8% per year for ’23 and ’22-’24, respectively (based on 16 analysts).
• YF projects YOY 9.5% and 2.8% for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 2.8% and 6.5% for ’23 and ’24, respectively (7).
• CFRA projects 5.4% YOY and 5.8% per year for ’23 and ’22-’24, respectively (11).
• M* gives an ACE of 14.2% per year for the next two years.

I am forecasting toward the low end of the range at 4.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 26.1% YOY and 8.0% per year for ’23 and ’22-’24, respectively (based on 16 analysts), along with 5-year annualized growth of 4.8%.
• MarketWatch projects contraction of 8.1% and 1.2% per year for ’22-’24 and ’22-’25, respectively (16 analysts).
• Nasdaq.com projects growth of 0.5% YOY and 6.0% per year for ’24 and ’23-’25 (9/10/3 analysts for ’23/’24/’25).
• Seeking Alpha projects 4-year annualized growth of 4.8%.
• YF projects YOY 17.8% contraction and 3.1% growth for ’23 and ’24, respectively (11), along with 5-year annualized contraction of 13.3%.
• Zacks projects YOY contraction of 27.2% and 15.6% growth for ’23 and ’24, respectively (4), along with 5-year annualized growth of 10.1%.
• Value Line provides ACE of 10.2% annualized growth for the next 5 years.
• CFRA projects contraction of 17.9% YOY and 8.2% per year for ’23 and ’22-’24, respectively (15).

Only one of five long-term estimates is negative and its magnitude is the largest of all. My skepticism is somewhat offset by the fact that it (YF) has not changed in two quarters. My forecast is toward the lower end of the range (mean of five: 3.3%) at 1.0% per year. I will use an initial value of 2023 Q2 EPS $8.33/share (annualized) rather than ’22 EPS of $9.70.

My Forecast High P/E is 10.0. Over the past decade, high P/E has gone from 18.7 (’13) to 12.9 (’22) with a last-5-year mean of 13.4. My forecast—the last-5-year-mean average P/E of 10.0—is below the entire 10-year high P/E range.

My Forecast Low P/E is 3.0. Over the past decade, low P/E has gone from 8.2 (’13) to 5.7 (’22) with a last-5-year mean of 6.7. I am forecasting below the entire range (lowest was 4.1 in ’20).

My Low Stock Price Forecast (LSPF) of $25.00 is default based on $8.33/share initial value. This is 40.3% below the previous close and more than quintuple the 52-week low price of $7.50 seen the week of 3/8/23 (Black Swan, anyone?). Short of failing and having to shudder its doors, I don’t think $7.50 will be tested anytime soon

WAL starts paying a dividend in 2019 with an average Payout Ratio of 14.7% ever since. I am forecasting below the range [10.3% – 19.8%] at 9.0%.

These inputs land WAL in the HOLD zone with a U/D ratio of 2.2. Total Annualized Return (TAR) is 15.4%.

PAR (using Forecast Average—not High—P/E) is 6.4%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 237 studies (my study and 95 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 11.9%, 10.0%, 11.4, 6.1, and 14.2%, respectively. I am lower across the board.

MS high / low EPS are $14.04 / $8.76 versus my $8.75 / $8.33 (per share). My high EPS is lower due to a lower growth rate.

MS LSPF of $30.10 implies a Forecast Low P/E of 3.4: much less than the above-stated 6.1. MS LSPF is 43.7% less than the default $8.76/share * 6.1 = $53.44 (invalid on today’s date), which results in more conservative zoning. Despite this huge discrepancy, MS LSPF remains 20.4% greater than mine.

My TAR (over 15.0% preferred) is much less than the 28.6% from MS. MOS seems robust in the current study.

I track a few different [usually conflicting] valuation metrics. PEG is 0.6 and 5.3 per Zacks and my projected P/E, respectively. I tend to discount calculations with low/fractional component as NMF and the latter uses my extremely low 1.0% growth rate (MS is 10-fold larger). The 0.6 translates to significantly undervalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is 0.53. In this case, two meaningful computations do not conflict.

WAL is a BUY under $40. With a forecast high price of $87.50, TAR should meet my 15% criterion around $43.75/share. Unusually, it’s already there even before crossing above the 3:1 U/D threshold. Especially given the conservative inputs used in this study, I would probably feel comfortable investing right now.