On August 4, 2016, I introduced you to an undervalued mid-cap financial stock that proceeded to rise 60% by year-end. So I thought you might like to read about a similar opportunity today… or the exact same opportunity! Because the good news is that this wonderfully strong bank’s stock is still undervalued.
Zions Bancorporation (ZION) is a bank holding company that owns eight commercial banks with $63.2 billion in assets and almost 500 branches in 10 states throughout the western U.S. The company is based in Salt Lake City, Utah.
Many economic and regulatory changes are expected to bolster banks’ balance sheets and share prices this year, including prospects for rising interest rates, lower corporate income tax rates, a reduction in expensive regulatory requirements, and economic growth that increases demand for business loans.
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But even if none of those rosy economic scenarios take place, ZION is well-positioned with capital strength. As of December 31, in a common equity tier 1 (CET1) ranking vs. 23 banking peers, ZION ranked fifth strongest, and far ahead of the median. CET1 is a measure of bank solvency.
A focus on cost controls has reaped bigger-than-expected benefits for the company, via its efficiency ratio. Originally targeted to fall below 66% in 2016, the ratio fell farther, to 64.5%. I realize that it seems like 64.5% and 66% are practically identical numbers, but to people who stare at the bottom line, the improved efficiency ratio is a celebrated achievement. ZION also increased its net interest margin in 2016, while loan growth remained slow.
The biggest perceived risk to the bank’s balance sheet is an increase in energy loan losses, although I would not characterize that risk as a dark cloud looming on the horizon.
ZION’s earnings growth was already significant, despite long-term lackluster U.S. economic growth, and financial struggles at its peers’ home offices. Earnings per share (EPS) rose from $1.20 in 2015 (December year-end) to $1.99 in 2016, reflecting 65.8% earnings growth. For perspective, any stock with 15% annual earnings growth will make the first cut when I’m screening stocks for growth and value.
You might recall that companies throughout the investment, banking and insurance industries had lackluster earnings results in 2016. The only reason that their share prices have been climbing recently is that their earnings growth prospects for 2017 are very strong. However, ZION and Goldman Sachs (GS) had very strong earnings growth prospects last year, which is why those were the two bank stocks I recommended in 2016. By the way, GS also rose 50% through year-end, after my May 31 recommendation. And GS is still featured as a Strong Buy in the Cabot Undervalued Stocks Advisor Growth Portfolio.
The news gets better! Consensus estimates project ZION to achieve EPS of $2.46 and $2.92 in 2017 and 2018, reflecting growth of 23.6% and 18.7%.
It’s hard to find stocks that are achieving EPS growth of 15% or more, year after year. When you find one, it can often be a good idea to keep it, and add to your position, especially if its valuation remains low. In ZION’s case, the 2017 price/earnings ratio (P/E) is 17.5. According to my investment criteria, I generally don’t consider a stock to be fairly valued until its P/E rises to equal its EPS growth rate. There are, of course, nuances to that strategy, but all in all, I am very pleased with ZION’s current valuation. Therefore, despite ZION’s profitable share price trajectory in 2016, it remains an undervalued stock, with more room for share price growth.
ZION has a dividend yield of 0.7%, and an ex-dividend date of February 14. That’s not an exciting dividend, and the company does not increase the dividend on a regular annual schedule, but when it does announce a dividend increase, the increase is usually big. The company last announced a dividend increase of 33% in July 2016. The banking analyst at a major Wall Street investment bank expects a 38% dividend increase, at some point in the coming year.
Institutions own 91% of ZION shares; a bullish sign of professional confidence in the stock.
ZION’s President Scott J. McLean will make a presentation at the Credit Suisse Financial Services Forum this week. Investors can access the archive of the webcast through early March.
I would not be recommending ZION today if I thought the stock was at risk for having a big post-run-up price correction. If you’ll take a look at the price chart, you’ll see that after the 2016 run-up, the share price stabilized in a relatively narrow, sideways trading range, between 41.50 and 44.
There’s a variety of good news in ZION’s recent price action:
- ZION did not give back any of its 2016 share price gains. That means, essentially, that people who own the stock are not willing to sell it. They’re all holding it for further gains.
- Also, the longer a stock trades quietly and sideways like this, the stronger the base it’s forming in preparation for its next launch upward.
I love ZION’s price chart. I could buy stocks with this price chart all day long, and not feel the need to glance at my stock portfolio before heading on a three-week vacation to a deserted island without internet service.
I think this undervalued stock will have another very good year in 2017. Buy ZION now.
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