Rating Update: Stock Rating C-High Neutral (7/10/19)-Fauquier Bankshares Inc (FBSS).

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BUSINESS

Fauquier Bankshares, Inc. operates as the bank holding company for The Fauquier Bank that provides various consumer and commercial banking services to individuals, businesses, and industries. The company accepts various deposits, including interest and non-interest bearing demand deposit, money market deposit, and negotiable order of withdrawal accounts; and time deposits. Its loan products include secured and unsecured commercial and real estate loans, stand-by letters of credit and grants available credit for installment, unsecured and secured personal loans, residential mortgages, and home equity loans, as well as automobile and other types of consumer financing services.
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INVESTMENT RATING

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

Fauquier Bankshares has a current Value Trend Rating of C (High Neutral).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Fauquier Bankshares has a good Appreciation Score of 74 but a neutral Power Rating of 41, triggering the High Neutral Value Trend Rating.

Fauquier Bankshares’ stock is selling well below targeted value. The current stock price of $21.25 compares to targeted value 12 months forward of $39.
This high appreciation potential results in an appreciation score of 74 (only 26% of the universe has greater appreciation potential.)
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Fauquier Bankshares has a Power Rating of 41. (This neutral Power Rating indicates that FBSS’ chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: is in a slightly weakened position current; and recent price action has been neutral.

INVESTMENT PROFILE

FBSS’ financial strength is average. Financial strength rating is 41.
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Relative to the S&P 500 Composite, Fauquier Bankshares Inc has significant Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that FBSS is normal risk. Low stock price volatility is a positive for FBSS. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low expected growth, and low historical growth. FBSS’ valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. FBSS has unusually low market capitalization.

CURRENT SIGNALS

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

Fauquier Bankshares’ current technical position is mixed. The stock price is in a 1.9 month up move. The stock has appreciated 21.5% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Fauquier Bankshares Inc (NASDAQ: FBSS) has benefited from meaningful positive changes in investment behavior. Positive developments: the stock’s recent price rise disrupted its longer term downtrend, and positive upside/downside volume developed. Negative development: its shorter term price trend turned down.
The stock is currently rated C.
On 7/10/19, Fauquier Bankshares Inc (NASDAQ: FBSS) stock enjoyed a major increase of 14.6%, closing at $0.03. However, this advance was accompanied by unusually low trading volume at 50% of normal. The stock is unchanged during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2018, Fauquier Bankshares generated a very significant increase in cash of +$37.81 million (+129%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$13.58 million. Non-operating uses consumed -$5.45 million (-40% of EBITDA). Cash taxes consumed -$0.75 million (-5% of EBITDA). Withdrawal of investment from the business totalled +$16.77 million (+123% of EBITDA). On a net basis, debt investors supplied +$15.92 million (+117% of EBITDA) while equity investors received -$2.27 million (-17% of EBITDA).
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Fauquier Bankshares’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Fauquier Bankshares Inc Peer Group. (Since 2015 Non-operating Income, %EBITDA has experienced very sharp improvement.) In most years, Fauquier Bankshares was in the third quartile and lower quartile. Currently, Fauquier Bankshares is at the lower quartile at -40% of EBITDA (-$5.45 million).

Fauquier Bankshares’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Fauquier Bankshares Inc Peer Group. In most years, Fauquier Bankshares was in the top quartile and second quartile. Currently, Fauquier Bankshares is upper quartile at -5% of EBITDA (-$0.75 million).

Fauquier Bankshares’ Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Fauquier Bankshares Inc Peer Group. In most years, Fauquier Bankshares was in the top quartile and third quartile. Currently, Fauquier Bankshares is at the upper quartile at +123% of EBITDA (+$16.77 million).

Fauquier Bankshares’ Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Fauquier Bankshares Inc Peer Group. In most years, Fauquier Bankshares was in the lower quartile and top quartile. Currently, Fauquier Bankshares is at the upper quartile at +117% of EBITDA (+$15.92 million).

Fauquier Bankshares’ Equity Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Fauquier Bankshares Inc Peer Group. In most years, Fauquier Bankshares was in the second quartile and lower quartile. Currently, Fauquier Bankshares is slightly above median at -17% of EBITDA (-$2.27 million).

Fauquier Bankshares’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Fauquier Bankshares Inc Peer Group. In most years, Fauquier Bankshares was in the top quartile and lower quartile. Currently, Fauquier Bankshares is upper quartile at +278% of EBITDA (+$37.81 million).
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Fauquier Bankshares’ Cash, %Revenue has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Fauquier Bankshares Inc Peer Group. In most years, Fauquier Bankshares was in the top quartile. Currently, Fauquier Bankshares is upper quartile at +205%.

PROFITABILITY

Fauquier Bankshares’ return on equity reached a new post-2009 high in 2018.
This was due to strong negative trend in pretax operating return supported by strong negative trend in non-operating factors.
The productivity of Fauquier Bankshares’ assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend.
Reinforcing this trend, pretax margin experienced a volatile overall downtrend but it experienced a very sharp recovery after the 2015 low.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Fauquier Bankshares’ return on equity is upper quartile (9.9%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (1.0%) reflecting asset turnover that is above median (0.05X) and pretax margin at the lower quartile (20.9%).
Tax “keep” rate (income tax management) is at the upper quartile (89.2%) resulting in after tax return on assets that is slightly above median.
Financial leverage (leverage) is upper quartile (11.27X).

GROWTH RATES

There are no significant differences between Fauquier Bankshares’ longer term growth and growth in recent years.
Fauquier Bankshares’ 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 -1.2% per year. (More recently it has been 7.6%.)

Total asset growth has been 1.4% per year.

Annual E.P.S. growth has been 3.9% per year.

Equity growth has been 3.1% per year.
No consensus growth rate forecast is available for Fauquier Bankshares.
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Relative to the Fauquier Bankshares Inc Peer Group, Fauquier Bankshares’ historical growth measures are erratic. E.P.S. growth (3.9%) has been substantially below median. Equity growth (3.1%) has been at the lower quartile. Revenue growth (-1.2%) has been lower quartile. Total asset growth (1.4%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Fauquier Bankshares’ stock price performance has been variable and below market. Between September, 2008 and July, 2019, Fauquier Bankshares’ stock price rose +37%; relative to the market, this was a -46% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 2.8% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through June, 2019 of 2.8% is upper quartile relative to Fauquier Bankshares Inc Peer Group.

Current 5-year total return performance of 10.0% is slightly below median relative to the S&P 500 Composite.
Through June, 2019, with slightly below median current 5-year total return of 10.0% relative to S&P 500 Composite, Fauquier Bankshares’ total return performance is at the upper quartile relative to Fauquier Bankshares Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, FBSS’ overall valuation is quite low. The highest factor, the ratio of enterprise value/revenue, is below median. Ratio of enterprise value/earnings before interest and taxes is at the lower quartile. Price/earnings ratio is at the lower quartile. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.
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Fauquier Bankshares has a major value gap compared to the median. For FBSS to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.46X to 5.01X. If FBSS’ ratio of enterprise value/revenue were to rise to 5.01X, its stock price would be higher by $22 to $44.
For FBSS to achieve upper quartile valuation relative to the Fauquier Bankshares Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.46X to 6.65X. If FBSS’ ratio of enterprise value/revenue were to rise to 6.65X, its stock price would increase by $37 from the current level of $21.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, FBSS is expected to continue to be a Value Builder.
Fauquier Bankshares’ current Price Target of $39 represents a +84% change from the current price of $21.25.
This high appreciation potential results in an appreciation score of 74 (only 26% of the universe has greater appreciation potential.)
With this high Appreciation Score of 74, the neutral Power Rating of 41 results in an Value Trend Rating of C.
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Fauquier Bankshares’ current Price Target is $39 (+4% from the 2018 Target of $38 and +84% from the 07/10/19 price of $21.25). This plateau in the Target is the result of a +11% increase in the equity base and a -6% decrease in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in return on equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
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PTR’s return on equity forecast is 9.4% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well above the 2015 low of 4%.

PTR’s growth forecast is 7.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is above the 2017 low of 2%.

PTR’s cost of equity forecast is 6.1% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is above the 2015 low of 4.0%.
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At Fauquier Bankshares’ current price of $21.25, investors are placing a negative value of $-10 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 9.8% versus a cost of equity of 5.3%.
PTR’s 2020 Price Target of $39 is based on these forecasts and reflects an estimated value of existing assets of $28 and a value of future investments of $11.

About John Lafferty 40696 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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