WAL Stock Study (7-3-23)

Posted by Mark on August 22, 2023 at 07:02 | Last modified: July 3, 2023 10:49

I recently did a stock study on Western Alliance Bancorp (WAL) with a closing price of $36.47. The original study is 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 assets and EPS at annualized rates of 22.3% and 24.5%, respectively. Lines are mostly up, straight, and parallel (including total assets and sales). PTPM has led peer and industry averages while trending up from 41.2% in ’13 to 57.5% in ’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% in ’13 to 21.0% in ’22 with a last-5-year mean of 18.4%. Debt-to-Capital has been lower than peer and industry averages despite increasing from 30.9% in ’13 to 55.7% in ’22 for a last-5-year mean of 26.2%. Value Line has recently trimmed its Financial Strength rating to B+.

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.

With regard to sales growth:

• CNN Business projects flat YOY and 3.8% growth per year for ’23 and ’22-’24, respectively (based on 16 analysts).
• YF projects YOY 6.6% and 3.5% for ’23 and ’24, respectively (6 analysts).
• Zacks projects YOY 1.6% and 5.9% for ’23 and ’24, respectively (6).
• CFRA projects 2.5% YOY and 4.5% per year for ’23 and ’22-’24, respectively (9).
• M* gives an ACE of 10.0% per year for the next two years.

The estimates have not stopped going down. I am lowering my forecast as well to 3.0%.

With regard to EPS growth:

• CNN Business projects contraction of 23.6% YOY and 6.9% per year for ’23 and ’22-’24, respectively (based on 16 analysts), along with 5-year annualized growth of 2.5%.
• MarketWatch projects 6.9% contraction per year and 1.0% growth per year for ’22-’24 and ’22-’25 (16 analysts).
• Nasdaq.com projects 0.1% YOY contraction and 11.2% growth per year for ’24 and ’23-’25 [9, 10, and 1 analyst(s) for ’23, ’24, and ’25].
• Seeking Alpha projects 4-year annualized contraction of 7.0%.
• YF projects YOY 15.5% contraction and 3.9% growth for ’23 and ’24, respectively (12), along with 5-year annualized contraction of 13.3%.
• Zacks projects YOY contraction of 15.8% and 0.1% for ’23 and ’24 (9) along with 5-year annualized growth of 10.1%.
• Value Line projects contraction of 15.2% YOY and 7.0% per year for ’23 and ’22-’24, respectively, and offers a 5-year-annualized ACE of 10.2%.
• CFRA projects contraction of 17.3% YOY and 7.3% per year for ’23 and ’22-’24, respectively (14).

The range of five long-term estimates is -13.3% to +10.2%. For high EPS, I will forecast zero growth: just below the 5-estimate mean (+0.5%). For low EPS, I will forecast -2.0%. I will use an initial value of ’23 Q1 EPS $8.76/share (annualized) rather than ’22 EPS of $9.70.

My Forecast High P/E is 9.0. From ’13-’22, high P/E has gone from 18.7 to 12.9 with a last-5-year mean of 13.4. The last-5-year-mean average P/E is 10.0. I am forecasting below the entire range (down from 11.0 in previous WAL study).

My Forecast Low P/E is 2.0. From ’13-’22, low P/E has gone from 8.2 to 5.7 with a last-5-year mean of 6.7 (lowest was 4.1 in ’20). Due to the uncertainty and bank failures, I had previously forecast 1.0 to cover the 52-week low price. I now believe the panic selling for banks is behind us. Black Swans can occur anywhere: they just rarely do.

My Low Stock Price Forecast (LSPF) is the default value $15.80 based on $7.92/share initial value. This is 56.7% below the previous close and over double the 52-week low price of $7.50 seen the week of 3/8/23.

Again, short of failing and having to shudder its doors, I don’t think the 52-week low will be tested anytime soon.

WAL 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 9.0%.

These inputs land WAL in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 17.7%.

PAR (using Forecast Average—not High—P/E) is 7.4%, which is less than I seek for a medium-size stock. 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 263 studies over the past 90 days (130 outliers including my study excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 11.7%, 10.6%, 11.2, 5.9, and 14.2%, respectively. I am lower across the board. Value Line projects an average annual P/E of 4.3, which is lower than MS (8.6) and mine (5.5). This Value Line estimate is for 2024, though, which is two years out rather than five. Should a normal recovery occur, I expect to see a P/E range only slightly lower than historical averages (last 4-year-mean average annual P/E is 9.3 per Value Line).

MS high/low EPS is $14.96/$8.76 vs. my $8.76/$7.92 (per share). My high EPS is lower due to a lower forecast growth rate.

MS LSPF of $25.20 implies a Forecast Low P/E of 2.9 as opposed to the above-stated 5.9. This is 51.2% less than the default value of 5.9 * $8.76/share = $51.68/share, which results in more conservative zoning. It remains 59.5% higher than mine.

MOS seems robust in the current study.

PEG ratio and Relative Value [(current P/E) / 5-year-mean average P/E] are other valuation metrics I have recently begun to monitor. Zacks reports PEG of 0.99 (lower limit of fair value generally regarded as 1.0). Relative Value (M* data) is 0.42. Both of these reflect the stock as undervalued.

I would look to BUY under $31/share.