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WAL Stock Study (4-12-23)

Posted by on April 28, 2023 at 06:33 | Last modified: July 3, 2023 10:16

I 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:

On 4/12/23, we have:

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:

10% was less than the narrow range of five long-term estimates (mean 11%).

Here’s what we have today:

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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