Rating Update: Stock Rating C-High Neutral (7/12/19)-F.N.B. Corp (FNB).

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BUSINESS

F.N.B. Corporation, a financial holding company, provides a range of financial services primarily to consumers, corporations, governments, and small- to medium-sized businesses. The company operates through four segments: Community Banking, Wealth Management, Insurance, and Consumer Finance. It offers commercial banking solutions, including corporate and small business banking, investment real estate financing, business credit, capital market, and lease financing services. The company also provides consumer banking products and services, such as deposit products, mortgage and consumer lending services, and mobile and online banking services; and wealth management services comprising asset management, private banking, and insurance services.
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INVESTMENT RATING

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FNB’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to be a modest Value Builder.

F.N.B. has a current Value Trend Rating of C (High Neutral).
This rating combines consistent signals from two proprietary PTR measures of a stock’s attractiveness. F.N.B. has a slightly positive Appreciation Score of 66 and a neutral Power Rating of 50, resulting in the High Neutral Value Trend Rating.

F.N.B.’s stock is selling well below targeted value. The current stock price of $11.75 compares to targeted value 12 months forward of $18.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
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F.N.B. has a Power Rating of 50. (This neutral Power Rating indicates that F.N.B.’s 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. An offsetting factor is earnings estimate behavior for F.N.B. has been slightly favorable recently.

INVESTMENT PROFILE

F.N.B.’s financial strength is exceptional. Financial strength rating is 94.
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Relative to the S&P 500 Composite, F.N.B. Corp has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that FNB is lower risk. Relative weaknesses include: low forecasted profitability, low historical profitability, and high stock price volatility. F.N.B.’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. FNB has unusually low market capitalization.

CURRENT SIGNALS

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

F.N.B.’s current technical position is mixed. The stock price is in a 4.4 month up move. The stock has appreciated 28.2% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average. The stock has just risen above its 200 day moving average.

ALERTS

Recent minimal positive changes in fundamentals have benefitted F.N.B. Corporation (NYSE: FNB): significant quarterly earnings acceleration occurred.
The stock is currently rated C.
On 7/12/19, F.N.B. Corporation (NYSE: FNB) stock enjoyed a major increase of 100.0%, closing at $0.00. However, this advance was accompanied by unusually low trading volume at 51% of normal. The stock has performed in line with the market over the last nine months and has risen 1.4% during the last week.

CASH FLOW

In 2018, F.N.B. experienced no change in cash of +$8.6 million (+2%). Sources of cash balanced uses. Cash generated from 2018 EBITDA totalled +$663.2 million. Non-operating uses consumed -$155.9 million (-24% of EBITDA). Cash taxes consumed -$79.5 million (-12% of EBITDA). Re-investment in the business amounted to -$654.7 million (-99% of EBITDA). On a net basis, debt investors provided +$409.5 million (+62% of EBITDA) while equity investors removed -$174.1 million (-26% of EBITDA).
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F.N.B.’s Non-operating Income, %EBITDA has enjoyed a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the F.N.B. Corp Peer Group. In most years, F.N.B. was in the third quartile and second quartile. Currently, F.N.B. is substantially above median at -24% of EBITDA (-$155.9 million).

F.N.B.’s Cash Taxes, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by a similar trend for the F.N.B. Corp Peer Group. In most years, F.N.B. was in the second quartile and top quartile. Currently, F.N.B. is above median at -12% of EBITDA (-$79.5 million).

F.N.B.’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 F.N.B. Corp Peer Group. In most years, F.N.B. was in the third quartile and lower quartile. Currently, F.N.B. is slightly below median at -99% of EBITDA (-$654.7 million).

F.N.B.’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the F.N.B. Corp Peer Group. In most years, F.N.B. was in the top quartile and second quartile. Currently, F.N.B. is above median at +62% of EBITDA (+$409.5 million).

F.N.B.’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the F.N.B. Corp Peer Group. In most years, F.N.B. was in the top quartile. Currently, F.N.B. is slightly below median at -26% of EBITDA (-$174.1 million).

F.N.B.’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the F.N.B. Corp Peer Group. In most years, F.N.B. was in the second quartile and top quartile. Currently, F.N.B. is slightly below median at +1% of EBITDA (+$8.6 million).
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F.N.B.’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the F.N.B. Corp Peer Group. (Since 2015 Cash, %Revenue has accelerated very sharply.) In most years, F.N.B. was in the third quartile and lower quartile. Currently, F.N.B. is at the lower quartile at +34%.

PROFITABILITY

F.N.B.’s return on equity reached a new post-2009 high in 2019.
This was due to very strong positive trend in pretax operating return and minor negative trend in non-operating factors.
The productivity of F.N.B.’s assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend but it experienced a small recovery after the 2013 low.
More than offsetting this trend, however, pretax margin enjoyed a very strong overall uptrend that sharply decelerated from the 2012 level.
Non-operating factors (income taxes and financial leverage) had a small negative influence on return on equity.
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F.N.B.’s return on equity is below median (8.3%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (1.4%) reflecting asset turnover that is at the lower quartile (0.04X) and at median pretax margin (31.2%).
Tax “keep” rate (income tax management) is at the upper quartile (82.5%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is below median (7.37X).

GROWTH RATES

There are no significant differences between F.N.B.’s longer term growth and growth in recent years.
F.N.B.’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 0.4% per year.

Total asset growth has been 3.6% per year.

Annual E.P.S. growth has been 7.9% per year.

Equity growth has been 4.8% per year.

F.N.B.’s consensus growth rate forecast (average of Wall Street analysts) is 9.5% — substantially above the average of the historical growth measures.
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Relative to the F.N.B. Corp Peer Group, F.N.B.’s historical growth measures are consistently second quartile. Equity growth (4.8%) has been above median. Total asset growth (3.6%) has been substantially above median. Revenue growth (0.4%) has been at median. E.P.S. growth (7.9%) has been at median.

In agreement with this pattern, consensus growth forecast (9.5%) is upper quartile.
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PRICE HISTORY

Over the full time period, F.N.B.’s stock price performance has been variable and significantly below market. Between September, 2008 and July, 2019, F.N.B.’s stock price fell -26%; relative to the market, this was a -72% loss. Significant price moves during the period: 1) September, 2011 – November, 2015: +69%; and 2) September, 2008 – February, 2009: -61%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -8.6% 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 June, 2019 of -8.6% is slightly below median relative to F.N.B. Corp Peer Group.

Current 5-year total return performance of 2.0% is lower quartile relative to the S&P 500 Composite.
Through June, 2019, with lower quartile current 5-year total return of 2.0% relative to S&P 500 Composite, F.N.B.’s total return performance is lower quartile relative to F.N.B. Corp Peer Group.
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VALUATION BENCHMARKS

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

Relative to F.N.B. Corp Peer Group, FNB’s overall valuation is normal. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Ratio of enterprise value/revenue is at the upper quartile. Ratio of enterprise value/assets is above median. Price/earnings ratio is lower quartile. The lowest factor, the price/equity ratio, is lower quartile.
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F.N.B. has a large value gap compared to the median valuation. For FNB to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 5.56X to 5.28X. If FNB’s ratio of enterprise value/revenue were to fall to 5.28X, its stock price would be lower by $-1 to $10.
For FNB to fall to lower quartile valuation relative to the F.N.B. Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 5.56X to 3.31X. If FNB’s ratio of enterprise value/revenue were to fall to 3.31X, its stock price would decline by $-10 from the current level of $12.

VALUE TARGETS

FNB’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to be a modest Value Builder.
F.N.B.’s current Price Target of $19 represents a +61% change from the current price of $11.75.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 66, the neutral Power Rating of 50 contributes to an Value Trend Rating of C.
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F.N.B.’s current Price Target is $19 (+9% from the 2018 Target of $17 and +61% from the 07/12/19 price of $11.75). This slight rise in the Target is the result of a +0% increase in the equity base and a +8% increase in the price/equity multiple. The forecasted increase in cost of equity has a very slight negative impact on the price/equity multiple and the forecasted decline in growth has a very slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a large positive impact.
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PTR’s return on equity forecast is 8.8% — in line with our recent forecasts. Forecasted return on equity erratic but little changed between 2010 and 2018. The current forecast is steady at the 2010 low of 7%.

PTR’s growth forecast is 3.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2010 and 2018. The current forecast is above the 2013 low of -2%.

PTR’s cost of equity forecast is 7.3% — in line with recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2010 and 2018. The current forecast is steady at the 2010 low of 5.7%.
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At F.N.B.’s current price of $11.75, investors are placing a negative value of $-5 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 8.1% versus a cost of equity of 7.2%.
PTR’s 2020 Price Target of $19 is based on these forecasts and reflects an estimated value of existing assets of $17 and a value of future investments of $1.

About John Lafferty 52821 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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