Rating Update: Stock Rating C-High Neutral (12/3/19)-National Bankshares Inc (NKSH).

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BUSINESS

National Bankshares, Inc. operates as the bank holding company for the National Bank of Blacksburg that provides retail and commercial banking services to individuals, businesses, non-profits, and local governments. The company accepts interest-bearing and non-interest bearing demand deposit accounts, money market deposit accounts, savings accounts, certificates of deposits, and individual retirement accounts Its loan products include commercial and agricultural, commercial real estate, residential real estate, home equity, and various consumer loan products, as well as loans for the construction of commercial and residential properties.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, NKSH is expected to continue to be a Value Builder.

National Bankshares has a current Value Trend Rating of C (High Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. National Bankshares has a neutral Power Rating of 55 and a slightly positive Appreciation Score of 61, and the High Neutral Value Trend Rating results.

National Bankshares’ stock is selling well below targeted value. The current stock price of $43.01 compares to targeted value 12 months forward of $58.
This moderately high appreciation potential results in an appreciation score of 61 (only 39% of the universe has greater appreciation potential.)
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National Bankshares has a Power Rating of 55. (This neutral Power Rating indicates that NKSH’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; earnings estimate behavior for NKSH has been slightly favorable recently; and recent price action has been neutral.

INVESTMENT PROFILE

NKSH’s financial strength is high. Financial strength rating is 79.
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Relative to the S&P 500 Composite, National Bankshares Inc has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that NKSH is lower risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low expected growth, and low historical growth. NKSH’s valuation is low: high dividend yield, moderate P/E ratio, and low price/book ratio. NKSH has unusually low market capitalization.

CURRENT SIGNALS

National Bankshares’ current operations are strong. Return on equity is rising, reflecting: improving asset utilization; and rising tax keep rate.

National Bankshares’ current technical position is very strong. The stock price is in a 3.0 month up move. The stock has appreciated 40.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Slight positive changes in fundamentals have recently occurred for National Bankshares Inc (NASDAQ: NKSH): significant quarterly earnings acceleration occurred.
The stock is currently rated C.
National Bankshares Inc (NASDAQ: NKSH) stock closed at $2.04 on 12/3/19 after a major increase of 13.3%. However, exceptionally low trading volume at 50% of normal accompanied the advance. The stock has declined -6.4% during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2018, National Bankshares experienced a significant decline in cash of -$7.79 million (-12%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$29.64 million. Non-operating uses consumed -$10.11 million (-34% of EBITDA). Cash taxes consumed -$2.56 million (-9% of EBITDA). Re-investment in the business amounted to -$13.94 million (-47% of EBITDA). In 2018, debt investors had no impact on cash while equity investors withdrew -$10.81 million (-36% of EBITDA).
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National Bankshares’ Non-operating Income, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by an opposite trend for the National Bankshares Inc Peer Group. In most years, National Bankshares was in the top quartile and second quartile. Currently, National Bankshares is at the lower quartile at -34% of EBITDA (-$10.11 million).

National Bankshares’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the National Bankshares Inc Peer Group as well. In most years, National Bankshares was in the top quartile. Currently, National Bankshares is upper quartile at -9% of EBITDA (-$2.56 million).

National 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 National Bankshares Inc Peer Group. (Since 2016 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, National Bankshares was in the second quartile and top quartile. Currently, National Bankshares is slightly above median at -47% of EBITDA (-$13.94 million).

National Bankshares’ Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the National Bankshares Inc Peer Group. In most years, National Bankshares was in the second quartile and top quartile. Currently, National Bankshares is at median at 0% of EBITDA ( $0.00 million).

National Bankshares’ Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the National Bankshares Inc Peer Group. In most years, National Bankshares was in the third quartile and top quartile. Currently, National Bankshares is substantially below median at -36% of EBITDA (-$10.81 million).

National Bankshares’ Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the National Bankshares Inc Peer Group. (Since 2016 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, National Bankshares was in the top quartile and lower quartile. Currently, National Bankshares is substantially below median at -26% of EBITDA (-$7.79 million).
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National Bankshares’ Cash, %Revenue has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the National Bankshares Inc Peer Group. (Since 2015 Cash, %Revenue has experienced a very sharp decline.) In most years, National Bankshares was in the top quartile. Currently, National Bankshares is upper quartile at +111%.

PROFITABILITY

National Bankshares’ return on equity has eroded very significantly since 2009 but it experienced a very sharp recovery after the 2017 low.
This very significant erosion was due to strong negative trend in pretax operating return and minor negative trend in non-operating factors.
The productivity of National Bankshares’ assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Non-operating factors (income taxes and financial leverage) had a small negative influence on return on equity.
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National Bankshares’ return on equity is at the lower quartile (9.2%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is at median (1.6%) reflecting asset turnover that is at the lower quartile (0.04X) and substantially above median pretax margin (38.6%).
Tax “keep” rate (income tax management) is at the upper quartile (85.0%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is lower quartile (6.77X).

GROWTH RATES

There are no significant differences between National Bankshares’ longer term growth and growth in recent years.
National 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 -1.6% per year.

Total asset growth has been 2.6% per year.

Annual E.P.S. growth has been -0.1% per year.

Equity growth has been 4.6% per year.
No consensus growth rate forecast is available for National Bankshares.
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Relative to the National Bankshares Inc Peer Group, National Bankshares’ historical growth measures are erratic. Equity growth (4.6%) has been slightly above median. Total asset growth (2.6%) has been at median. Revenue growth (-1.6%) has been substantially below median. E.P.S. growth (-0.1%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, National Bankshares’ stock price performance has been below market. Between February, 2009 and December, 2019, National Bankshares’ stock price rose +129%; relative to the market, this was a -46% loss. Significant price move during the period: 1) September, 2014 – May, 2018: +73%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 0.6% is substantially below median relative to the S&P 500 Composite.
In addition to being substantially below median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 0.6% is slightly above median relative to National Bankshares Inc Peer Group.

Current 5-year total return performance of 9.5% is slightly below median relative to the S&P 500 Composite.
Through October, 2019, with slightly below median current 5-year total return of 9.5% relative to S&P 500 Composite, National Bankshares’ total return performance is below median relative to National Bankshares Inc Peer Group.
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VALUATION BENCHMARKS

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

Relative to National Bankshares Inc Peer Group, NKSH’s overall valuation is low. The highest factor, the price/earnings ratio, is upper quartile. Price/equity ratio is at the upper quartile. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
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National Bankshares has a major value gap compared to the median. For NKSH to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.50X to 4.92X. If NKSH’s ratio of enterprise value/revenue were to rise to 4.92X, its stock price would be higher by $20 to $63.
For NKSH to achieve upper quartile valuation relative to the National Bankshares Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.50X to 6.18X. If NKSH’s ratio of enterprise value/revenue were to rise to 6.18X, its stock price would increase by $30 from the current level of $43.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, NKSH is expected to continue to be a Value Builder.
National Bankshares’ current Price Target of $58 represents a +34% change from the current price of $43.01.
This moderately high appreciation potential results in an appreciation score of 61 (only 39% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 61, the neutral Power Rating of 55 contributes to an Value Trend Rating of C.
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National Bankshares’ current Price Target is $58 (-4% from the 2018 Target of $60 but +34% from the 12/03/19 price of $43.01). This plateau in the Target is the result of a +2% increase in the equity base and a -6% decrease in the price/equity multiple. The forecasted increase in cost of equity has a slight 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 slight positive impact.
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PTR’s return on equity forecast is 8.9% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2011 peak of 12%.

PTR’s growth forecast is 4.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is steady at the 2015 low of 2%.

PTR’s cost of equity forecast is 5.6% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, steady decline between 2010 and 2018. The current forecast is steady at the 2010 peak of 6.2%.
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At National Bankshares’ current price of $43.01, investors are placing a negative value of $-7 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 9.2% versus a cost of equity of 5.3%.
PTR’s 2020 Price Target of $58 is based on these forecasts and reflects an estimated value of existing assets of $47 and a value of future investments of $11.

About John Lafferty 54938 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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