Rating Update: Stock Rating C-High Neutral (11/8/19)-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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With future capital returns forecasted to be in line with the cost of capital, FNB is expected to continue to be Value Creation neutral.

F.N.B. has a current Value Trend Rating of C (High Neutral).
The Value Trend Rating reflects highly consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. F.N.B. has a neutral Power Rating of 57 and a neutral Appreciation Score of 58, with the High Neutral Value Trend Rating the result.

F.N.B.’s stock is selling well below targeted value. The current stock price of $12.57 compares to targeted value 12 months forward of $16.
This neutral appreciation potential results in an appreciation score of 58 (42% of the universe has greater appreciation potential.)
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F.N.B. has a Power Rating of 57. (This neutral Power Rating indicates that F.N.B.’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: is currently in a modestly favorable positi; recent price action has been neutral; and 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 93.
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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, and low historical profitability. 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 very strong. The stock price is in a 10.7 month up move. The stock has appreciated 30.4% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Recent small positive changes in fundamentals have benefitted F.N.B. Corp (NYSE: FNB): significant quarterly earnings acceleration occurred.
The stock is currently rated C.
F.N.B. Corp (NYSE: FNB) stock enjoyed a major increase of 17.1% on 11/8/19. The shares closed at $4.32. However, trading volume in this advance was below average at 82% of normal. The stock has performed in line with the market over the last nine months and has risen 4.2% 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 contributed +$409.5 million (+62% of EBITDA) while equity investors received -$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 lower 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 top quartile and second quartile. Currently, F.N.B. is at the upper quartile 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 and second quartile. Currently, F.N.B. is slightly above 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 lower quartile. Currently, F.N.B. is at 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 even as 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 at median (8.3%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is below median (1.4%) reflecting asset turnover that is at the lower quartile (0.04X) and at median pretax margin (30.6%).
Tax “keep” rate (income tax management) is at the upper quartile (83.3%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is at median (7.28X).

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 0.6% per year. (More recently it has been 3.8%.)

Total asset growth has been 3.6% per year.

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

Equity growth has been 4.9% per year.

F.N.B.’s consensus growth rate forecast (average of Wall Street analysts) is 9.0% — 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. Revenue growth (0.6%) has been above median. Total asset growth (3.6%) has been substantially above median. E.P.S. growth (7.9%) has been slightly above median. Equity growth (4.9%) has been above median.

In agreement with this pattern, consensus growth forecast (9.0%) 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 January, 2009 and November, 2019, F.N.B.’s stock price rose +59%; relative to the market, this was a -58% loss. Significant price move during the period: 1) September, 2011 – November, 2015: +69%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 6.3% 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 October, 2019 of 6.3% is slightly above median relative to F.N.B. Corp Peer Group.

Current 5-year total return performance of 2.6% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of 2.6% relative to S&P 500 Composite, F.N.B.’s total return performance is at the 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 at the upper quartile. Ratio of enterprise value/revenue is near 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 major value gap compared to the median. For FNB to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 5.79X to 4.63X. If FNB’s ratio of enterprise value/revenue were to fall to 4.63X, its stock price would be lower by $-5 to $7.
For FNB to achieve upper quartile valuation relative to the F.N.B. Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 5.79X to 5.98X. If FNB’s ratio of enterprise value/revenue were to rise to 5.98X, its stock price would increase by $1 from the current level of $13.

VALUE TARGETS

With future capital returns forecasted to be in line with the cost of capital, FNB is expected to continue to be Value Creation neutral.
F.N.B.’s current Price Target of $17 represents a +32% change from the current price of $12.57.
This neutral appreciation potential results in an appreciation score of 58 (42% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 58, the neutral Power Rating of 57 contributes to an Value Trend Rating of C.
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F.N.B.’s current Price Target is $17 (-5% from the 2018 Target of $17 but +32% from the 11/08/19 price of $12.57). This plateau in the Target is the result of a +0% increase in the equity base and a -5% decrease in the price/equity multiple. Each of the Value Drivers contributed to this decline in the price/equity multiple. The forecasted decline in return on equity has a very slight negative impact on the multiple. The forecasted decline in growth also has a very slight negative impact as did the increase in cost of equity.
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PTR’s return on equity forecast is 7.9% — 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 7.2% — 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 $12.57, 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 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 $17 is based on these forecasts and reflects an estimated value of existing assets of $16 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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