Rating Update: Stock Rating C-Low Neutral (9/30/19)-First Northwest Bancorp (FNWB).

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BUSINESS

First Northwest Bancorp operates as a bank holding company for First Federal Savings and Loan Association of Port Angeles that provides commercial and consumer banking services to individuals, businesses, and nonprofit organizations in western Washington, the United States. The company offers various deposit instruments, including checking accounts, money market deposit accounts, savings accounts, transaction accounts, and certificates of deposit. Its lending activities comprise one- to four-family mortgage loans, commercial and multi-family real estate loans, construction and land loans, and commercial business loans, as well as consumer loans primarily consisting of automobile loans, and home-equity loans and lines of credit.
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INVESTMENT RATING

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FNWB is expected to continue to be a Value Eraser reflecting capital returns that are forecasted to fall short of the cost of capital.

FNWB has a current Value Trend Rating of C (Low Neutral).
This rating combines contradictory signals from two proprietary PTR measures of a stock’s attractiveness. FNWB has a poor Appreciation Score of 29 but a slightly positive Power Rating of 61, triggering the Low Neutral Value Trend Rating.

FNWB’s stock is selling above targeted value. The current stock price of $17.32 compares to targeted value 12 months forward of $15.
This low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
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FNWB has a Power Rating of 61. (This slightly positive Power Rating indicates that FNWB’s chances of achieving favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly positive Power Rating include: is currently in a modestly favorable positi; and recent price action has been slightly favorable.

INVESTMENT PROFILE

FNWB’s financial strength is high. Financial strength rating is 84.
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Relative to the S&P 500 Composite, First Northwest Bancorp has slightly more Value than Growth characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that FNWB is normal risk. Relative weaknesses include: low forecasted profitability, and low historical profitability. FNWB’s valuation is high: low dividend yield, high P/E ratio, and low price/book ratio. FNWB has unusually low market capitalization.

CURRENT SIGNALS

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

FNWB’s current technical position is very strong. The stock price is in a 11.2 month up move. The stock has appreciated 23.3% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

The stock is currently rated C.
First Northwest Bancorp (NASDAQ: FNWB) stock closed at $0.04 on 9/30/19 after a major increase of 65.1%. Moreover, above average trading volume at 134% of normal accompanied the advance. The stock has risen 3.3% during the last week and has been strong relative to the market over the last nine months.

CASH FLOW

In 2018, FNWB generated a slight increase in cash of +$2.03 million (+8%). Sources of cash were slightly larger than uses. Cash generated from 2018 EBITDA totalled +$18.12 million. Non-operating uses consumed -$7.86 million (-43% of EBITDA). Cash taxes consumed -$1.58 million (-9% of EBITDA). Re-investment in the business amounted to -$53.22 million (-294% of EBITDA). On a net basis, debt investors furnished +$59.13 million (+326% of EBITDA) while equity investors withdrew -$12.56 million (-69% of EBITDA).
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FNWB’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the First Northwest Bancorp Peer Group. (Since 2015 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, FNWB was in the third quartile. Currently, FNWB is at the lower quartile at -43% of EBITDA (-$7.86 million).

FNWB’s Cash Taxes, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by a similar trend for the First Northwest Bancorp Peer Group. In most years, FNWB was in the second quartile. Currently, FNWB is slightly above median at -9% of EBITDA (-$1.58 million).

FNWB’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the First Northwest Bancorp Peer Group. In most years, FNWB was in the lower quartile. Currently, FNWB is lower quartile at -294% of EBITDA (-$53.22 million).

FNWB’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the First Northwest Bancorp Peer Group. (Since 2015 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, FNWB was in the top quartile. Currently, FNWB is upper quartile at +326% of EBITDA (+$59.13 million).

FNWB’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the First Northwest Bancorp Peer Group. In most years, FNWB was in the lower quartile. Currently, FNWB is lower quartile at -69% of EBITDA (-$12.56 million).

FNWB’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the First Northwest Bancorp Peer Group. (Since 2016 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, FNWB was in the top quartile. Currently, FNWB is slightly above median at +11% of EBITDA (+$2.03 million).
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FNWB’s Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the First Northwest Bancorp Peer Group. (Since 2015 Cash, %Revenue has accelerated very sharply.) In most years, FNWB was in the second quartile. Currently, FNWB is slightly above median at +51%.

PROFITABILITY

FNWB’s return on equity has improved very significantly since 2013 accelerating very sharply after the 2015 level.
This very significant improvement was due to very strong positive trend in pretax operating return and little change in non-operating factors.
The productivity of FNWB’s assets rose over the full period 2009-2019: asset turnover has exhibited a volatile overall uptrend that accelerated after the 2015 level.
Reinforcing this trend, pretax margin enjoyed 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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FNWB’s return on equity is at the lower quartile (4.7%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (0.8%) reflecting asset turnover that is lower quartile (0.04X) and below median pretax margin (18.7%).
Tax “keep” rate (income tax management) is at median (81.6%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is at median (7.13X).

GROWTH RATES

Overall, First Northwest Bancorp’s growth rate has slowed considerably in recent years.
First Northwest Bancorp’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 14.8% per year. (More recently it has been 21.3%.)

Total asset growth has been 13.0% per year.

Annual E.P.S. growth has been 26.9% per year. (More recently it has been 30.7%.)

Equity growth has been 18.7% per year. (More recently it has been 3.3%.)
No consensus growth rate forecast is available for First Northwest Bancorp.
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Relative to the First Northwest Bancorp Peer Group, FNWB’s historical growth measures are consistently top quartile. Equity growth (18.7%) has been upper quartile. Total asset growth (13.0%) has been upper quartile. Revenue growth (14.8%) has been at the upper quartile. E.P.S. growth (26.9%) has been at the upper quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, First Northwest Bancorp’s stock price performance has been highly stable and in line with the market. Between May, 2015 and September, 2019, First Northwest Bancorp’s stock price rose +41%; relative to the market, this was a -0% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 13.3% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through September, 2019 of 13.3% is upper quartile relative to First Northwest Bancorp Peer Group.

Current 5-year total return performance is not available.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, FNWB’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. Price/earnings ratio is slightly above median. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.
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FNWB has a very large value gap compared to the median. For FNWB to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 5.39X to 4.26X. If FNWB’s ratio of enterprise value/revenue were to fall to 4.26X, its stock price would be lower by $-6 to $12.
For FNWB to achieve upper quartile valuation relative to the First Northwest Bancorp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 5.39X to 6.40X. If FNWB’s ratio of enterprise value/revenue were to rise to 6.40X, its stock price would increase by $5 from the current level of $17.

VALUE TARGETS

FNWB is expected to continue to be a Value Eraser reflecting capital returns that are forecasted to fall short of the cost of capital.
First Northwest Bancorp’s current Price Target of $15 represents a -15% change from the current price of $17.32.
This low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 29, the moderately high Power Rating of 61 results in an Value Trend Rating of C.
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First Northwest Bancorp’s current Price Target is $15 (+5% from the 2018 Target of $14 but -15% from the 09/30/19 price of $17.32). This plateau in the Target is the result of a +5% increase in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted increase in growth has no impact on the multiple. The forecasted increase in cost of equity also has no impact and the decline in return on equity didn’t either.
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PTR’s return on equity forecast is 4.0% — in line with our recent forecasts. Forecasted return on equity erratic but little changed between 2013 and 2018. The current forecast is steady at the 2013 low of 4%.

PTR’s growth forecast is 24.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2013 and 2018. The current forecast is significantly above the 2014 low of 4%.

PTR’s cost of equity forecast is 7.8% — in line with recent levels. Forecasted cost of equity suffered a dramatic, steady increase between 2013 and 2018. The current forecast is above the 2013 low of 5.0%.
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At First Northwest Bancorp’s current price of $17.32, investors are placing a positive value of $1 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 15.0% per year, and a return on equity of 4.0% versus a cost of equity of 6.5%.
PTR’s 2020 Price Target of $15 is based on these forecasts and reflects an estimated value of existing assets of $-5 and a value of future investments of $20.

About John Lafferty 77056 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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