Rating Update: Stock Rating C-Neutral (5/16/19)-Valley National Bancorp (VLY).

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BUSINESS

Valley National Bancorp operates as the holding company for the Valley National Bank that provides commercial, retail, trust, and investment services. The company operates through Commercial Lending, Consumer Lending, and Investment Management segments. Its deposit products include non-interest bearing, savings, NOW, and money market deposits, as well as certificates of deposit. The company’s loan products comprise construction, residential mortgage, home equity, automobile, and floating rate and adjustable rate commercial and industrial loans, as well as fixed rate owner occupied and commercial real estate loans, credit card loans, personal lines of credit, personal loans, and loans secured by cash surrender value of life insurance.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, VLY is expected to continue to be a modest Value Builder.

Valley Natl Bancorp has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Valley Natl Bancorp has a slightly positive Appreciation Score of 67 but a slightly negative Power Rating of 37, triggering the Neutral Value Trend Rating.

Valley Natl Bancorp’s stock is selling well below targeted value. The current stock price of $10.29 compares to targeted value 12 months forward of $16.
This moderately high appreciation potential results in an appreciation score of 67 (only 33% of the universe has greater appreciation potential.)
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Valley Natl Bancorp has a Power Rating of 37. (This slightly negative Power Rating indicates that VLY’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: recent price action has been neutral; earnings estimate behavior for VLY has been slightly negative recently; and is in a slightly weakened position current.

INVESTMENT PROFILE

VLY’s financial strength is high. Financial strength rating is 87.
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Relative to the S&P 500 Composite, Valley National Bancorp has moderate Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that VLY is normal risk. High expected growth is a positive for VLY. Relative weaknesses include: low forecasted profitability, low historical profitability, and high stock price volatility. VLY’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. VLY has unusually low market capitalization.

CURRENT SIGNALS

Valley Natl Bancorp’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

Valley Natl Bancorp’s current technical position is mixed. The stock price is in a 2.1 month up move. The stock has appreciated 23.4% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Recent meaningful negative changes in investment behavior have impacted Valley National Bancorp (NASDAQ: VLY): negative upside/downside volume developed.
Notable positive changes in fundamentals have recently occurred for Valley National Bancorp (NASDAQ: VLY): significant quarterly earnings acceleration occurred, and significant quarterly sales acceleration occurred.
The stock is currently rated C.
On 5/16/19, Valley National Bancorp (NASDAQ: VLY) stock enjoyed a major increase of 901.2%, closing at $0.27. Trading volume in this advance was normal. The stock has performed in line with the market over the last nine months and has declined -1.2% during the last week.

CASH FLOW

In 2018, Valley Natl Bancorp generated an increase in cash of +$12.5 million (+3%). Sources of cash were very slightly larger than uses. Cash generated from 2018 EBITDA totalled +$516.2 million. Non-operating uses consumed -$140.5 million (-27% of EBITDA). Cash taxes consumed -$68.3 million (-13% of EBITDA). Re-investment in the business amounted to -$1,573.1 million (-305% of EBITDA). On a net basis, debt investors contributed +$722.3 million (+140% of EBITDA) while equity investors contributed +$555.9 million (+108% of EBITDA).
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Valley Natl Bancorp’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Valley National Bancorp Peer Group. In most years, Valley Natl Bancorp was in the top quartile and second quartile. Currently, Valley Natl Bancorp is at the upper quartile at -27% of EBITDA (-$140.5 million).

Valley Natl Bancorp’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Valley National Bancorp Peer Group. In most years, Valley Natl Bancorp was in the lower quartile and top quartile. Currently, Valley Natl Bancorp is lower quartile at -13% of EBITDA (-$68.3 million).

Valley Natl Bancorp’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Valley National Bancorp Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Valley Natl Bancorp was in the lower quartile and top quartile. Currently, Valley Natl Bancorp is lower quartile at -305% of EBITDA (-$1,573.1 million).

Valley Natl Bancorp’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Valley National Bancorp Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Valley Natl Bancorp was in the second quartile and top quartile. Currently, Valley Natl Bancorp is upper quartile at +140% of EBITDA (+$722.3 million).

Valley Natl Bancorp’s Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Valley National Bancorp Peer Group. In most years, Valley Natl Bancorp was in the top quartile and third quartile. Currently, Valley Natl Bancorp is upper quartile at +108% of EBITDA (+$555.9 million).

Valley Natl Bancorp’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Valley National Bancorp Peer Group. In most years, Valley Natl Bancorp was in the third quartile and top quartile. Currently, Valley Natl Bancorp is at the lower quartile at +2% of EBITDA (+$12.5 million).
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Valley Natl Bancorp’s Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Valley National Bancorp Peer Group. (Since 2014 Cash, %Revenue has accelerated very sharply.) In most years, Valley Natl Bancorp was in the second quartile and top quartile. Currently, Valley Natl Bancorp is at the lower quartile at +33%.

PROFITABILITY

VLY’s return on equity has eroded modestly since 2009 but it experienced a very sharp recovery after the 2015 low.
This modest erosion was due to minor negative trend in pretax operating return and little change in non-operating factors.
The productivity of VLY’s assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend but it experienced a sharp recovery after the 2014 low.
Partially offsetting this trend, however, pretax margin has exhibited a volatile overall uptrend that accelerated very sharply from the 2015 level.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
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VLY’s return on equity is upper quartile (10.3%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at the upper quartile (1.4%) reflecting asset turnover that is below median (0.04X) and upper quartile pretax margin (31.3%).
Tax “keep” rate (income tax management) is lower quartile (74.8%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is at the upper quartile (10.04X).

GROWTH RATES

There are no significant differences between Valley National Bancorp’s longer term growth and growth in recent years.
Valley National Bancorp’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -2.1% per year. (More recently it has been 7.5%.)

Total asset growth has been 1.6% per year.

Annual E.P.S. growth has been 0.3% per year. (More recently it has been 19.2%.)

Equity growth has been 2.8% per year.
No consensus growth rate forecast is available for Valley National Bancorp.
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Relative to the Valley National Bancorp Peer Group, Valley Natl Bancorp’s historical growth measures are consistently lower quartile. Revenue growth (-2.1%) has been lower quartile. Total asset growth (1.6%) has been lower quartile. E.P.S. growth (0.3%) has been lower quartile. Equity growth (2.8%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Valley National Bancorp’s stock price performance has been variable and significantly below market. Between July, 2008 and May, 2019, Valley National Bancorp’s stock price fell -37%; relative to the market, this was a -72% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -12.9% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through April, 2019 of -12.9% is lower quartile relative to Valley National Bancorp Peer Group.

Current 5-year total return performance of 5.2% is substantially below median relative to the S&P 500 Composite.
Through April, 2019, with substantially below median current 5-year total return of 5.2% relative to S&P 500 Composite, Valley Natl Bancorp’s total return performance is at the lower quartile relative to Valley National Bancorp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, VLY’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. Price/earnings ratio is near the lower quartile. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.

Relative to Valley National Bancorp Peer Group, VLY’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is near the upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/assets is at median. Price/earnings ratio is at median. The lowest factor, the price/equity ratio, is at the lower quartile.
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Valley Natl Bancorp has a major value gap compared to the median. For VLY to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 5.27X to 4.34X. If VLY’s ratio of enterprise value/revenue were to fall to 4.34X, its stock price would be lower by $-4 to $7.
For VLY to achieve upper quartile valuation relative to the Valley National Bancorp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 5.27X to 5.54X. If VLY’s ratio of enterprise value/revenue were to rise to 5.54X, its stock price would increase by $1 from the current level of $10.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, VLY is expected to continue to be a modest Value Builder.
Valley National Bancorp’s current Price Target of $17 represents a +66% change from the current price of $10.29.
This moderately high appreciation potential results in an appreciation score of 67 (only 33% of the universe has greater appreciation potential.)
With this moderately high Appreciation Score of 67, the moderately low Power Rating of 37 results in an Value Trend Rating of C.
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Valley National Bancorp’s current Price Target is $17 (+15% from the 2018 Target of $15 and +66% from the 05/16/19 price of $10.29). This slight rise in the Target is the result of a +14% increase in the equity base and a +0% increase in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted increase in return on equity has a very slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 10.0% — in line with our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is above the 2013 low of 7%.

PTR’s growth forecast is 8.0% — substantially above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is significantly above the 2017 low of -2%.

PTR’s cost of equity forecast is 8.2% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is steady at the 2010 peak of 7.0%.
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At Valley National Bancorp’s current price of $10.29, investors are placing a negative value of $-4 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 9.9% versus a cost of equity of 6.9%.
PTR’s 2020 Price Target of $17 is based on these forecasts and reflects an estimated value of existing assets of $14 and a value of future investments of $3.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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