WAL Stock Study (7-1-24)

Posted by Mark on August 15, 2024 at 06:48 | Last modified: July 1, 2024 11:30

I recently did Western Alliance Bancorp (WAL) with a closing price of $62.82. Previous studies are here, 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. The company’s reportable segments are
     > Commercial segment includes provides commercial banking and treasury
     > management products and services to small and middle-market businesses,
     > specialized banking services to sophisticated commercial institutions and
     > investors within niche industries, as well as financial services to the
     > real estate industry. Consumer Related segment offers both commercial
     > banking services to enterprises in consumer-related sectors and consumer
     > banking services, such as residential mortgage banking. Corporate & Other.

Over the past 10 years, this medium-size company has grown sales and EPS at annualized rates of 21.1% and 20.6%, respectively. Lines are mostly up, straight, and parallel except for ’23 declines in sales and total assets.

Over the past decade, PTPM leads peer and industry averages despite falling from 48.2% (’14) to 43.9% (’23) with a last-5-year mean of 53.9%. ROE leads peer and industry averages despite falling from 17.4% (’14) to 13.1% (’23) with a last-5-year mean of 17.8%. Debt-to-Capital is lower than peer and industry averages despite increasing from 30.1% (’14) to 57.2% (’23) with a last-5-year mean of 33.8%.

Value Line rates the company B+ for Financial Strength.

ROAA increases from 1.36% in ’13 to 1.69% in ’22 before falling to 1.36% and 1.02% in the last two years (each a subsequent 10-year low). ROAA is one of several metrics that fall in ’23 as a series of bank failures rock the industry.

With regard to sales growth:

• YF projects YOY 16.2% and 10.4% for ’24 and ’25, respectively (based on 12 analysts).
• Zacks projects YOY 15.0% and 11.2% for ’24 and ’25, respectively (4 analysts).
• CFRA projects 16.2% YOY and 13.2% per year for ’24 and ’23-’25, respectively (12).
• M* gives an ACE of 26.0% per year for the next two years.

I am forecasting below the range at 10.0% per year.

With regard to EPS growth:

• MarketWatch projects 14.9% and 17.9% per year for ’23-’25 and ’23-’26, respectively (based on 18 analysts).
• Nasdaq.com projects 23.0% YOY and 15.4% per year for ’25 and ’24-’26 [9 / 9 / 1 analyst(s) for ’24 / ’25 / ’26].
• Seeking Alpha projects 4-year annualized growth of 9.6%.
• YF projects YOY 6.9% contraction and 22.1% growth for ’24 and ’25 (13) along with 5-year annualized growth of 7.1%.
• Zacks projects YOY growth of 4.2% and 22.6% for ’24 and ’25 (9) along with 5-year annualized growth of 7.1%.
• Value Line provides ACE of 7.1% annualized growth for the next 5 years (9).
• CFRA projects growth of 13.9% YOY and 18.2% per year for ’24 and ’23-’25, respectively (16).

My forecast of 5.0% per year is below the long-term estimate range. Mean of four estimates is 7.7% but I am skeptical of data duplication (lighter analyst coverage than four data sources suggest) because three are exact matches. Initial value is 2023 EPS of $6.54 (down 32.6% YOY) rather than 2024 Q1 EPS of $6.86/share (annualized).

My Forecast High P/E is 10.0. Over the past decade, high P/E ranges from 11.9 in ’19 to 20.3 in ’16 with a last-5-year mean of 12.7 and a last-5-year-mean average P/E of 8.9. I am below the entire 10-year high P/E range.

My Forecast Low P/E is 5.0. Over the past decade, low P/E falls from 12.2 (’14) to 1.1 (’23) with a last-5-year mean of 5.1. I am forecasting toward the lower end of the range [only ’23 (outlier) and ’20 (4.1) are lower].

My Low Stock Price Forecast (LSPF) is $43.00. Default based on initial value given above seems unreasonably low (47.9% less than previous close). My LSPF (arbitrary) is 31.6% less than the previous low and 20.5% greater than 52-week low.

WAL commences dividend in 2019 with a last-5-year mean Payout Ratio (PR) of 16.2%. My 9.0% forecast is below the range.

These inputs land WAL in the HOLD zone with a U/D ratio of 1.0. Total Annualized Return (TAR) is 6.7%.

PAR (using Forecast Average—not High—P/E) of 1.1% is less than the current yield on T-bills. 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 75 studies done in the past 90 days (my study along with 38 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 13.4%, 11.9%, 11.4, 5.1, and 15.3%, respectively. I am lower across the board. Value Line projects a 2025 [versus 2028] average annual P/E of 6.7 that is less than MS (8.3) and myself (7.5).

MS high / low EPS are $12.09 / $6.86 versus my $8.35 / $6.54 (per share). My high EPS is less due to a lower growth rate. Value Line’s ACE high EPS ~$9.20 is in the middle.

MS LSPF of $35.00 implies a Forecast Low P/E of 5.1: a perfect match. MS LSPF is 18.6% less than mine resulting in more conservative zoning.

With regard to valuation, PEG is 1.2 and 1.7 per Zacks and my projected P/E, respectively: the latter slightly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly elevated at 1.02.

MOS is robust in the current study because my inputs are below MS and the respective analyst/historical ranges. As further evidence, MS TAR of 19.8% is much higher than mine.

Western Alliance has survived the 2023 industry turbulence and bounced back from fire sale stock valuations. Those [of us: full disclosure] who bought with “blood in the streets” may consider selling now that valuation has normalized. My hesitation is the forecast double-digit sales growth and my sub-trendline initial value. If the latter normalizes, then next year’s First Cut should make for a more interesting read.

Per U/D, WAL is a BUY under ~$53/share. The stock needs to fall under $42 to meet the BI TAR criterion given a forecast high price of $83.50.