Rating Update: Stock Rating D-Negative (12/3/19)-Prudential Bancorp Inc (PBIP).

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BUSINESS

Prudential Bancorp, Inc. operates as the bank holding company for Prudential Bank that provides various banking and financial products or services. The company’s deposit products include interest-bearing and non-interest-bearing checking, money market, savings, and certificates of deposit accounts. Its loan portfolio comprises single-family residential mortgage loans, construction and land development loans, non-residential or commercial real estate mortgage loans, home equity loans and lines of credit, and commercial business loans, as well as consumer loans, such as loans secured by deposit accounts and unsecured personal loans. The company also manages a portfolio of investment and mortgage-backed securities; and provides ATM, and online and mobile banking services.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be below the cost of capital, PBIP is expected to continue to be a modest Value Eraser.

Prudential Bancorp has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Prudential Bancorp has a poor Appreciation Score of 25 but a neutral Power Rating of 56, producing the Negative Value Trend Rating.

Prudential Bancorp’s stock is selling well above targeted value. The current stock price of $17.83 compares to targeted value 12 months forward of $13.
Prudential Bancorp’s low appreciation potential results in an appreciation score of 25 (75% of the universe has greater appreciation potential.)
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Prudential Bancorp has a Power Rating of 56. (This neutral Power Rating indicates that PBIP’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 strong phase current; and recent price action has been neutral.

INVESTMENT PROFILE

PBIP’s financial strength is above average. Financial strength rating is 68.
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Relative to the S&P 500 Composite, Prudential Bancorp Inc has slightly more Value than Growth characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that PBIP is higher risk. High historical growth is a positive for PBIP. Relative weaknesses include: low forecasted profitability, low historical profitability, high financial leverage, low expected growth, and high earnings variability. PBIP’s valuation is low: high dividend yield, moderate P/E ratio, and low price/book ratio. PBIP has unusually low market capitalization.

CURRENT SIGNALS

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

Prudential Bancorp’s current technical position is very weak. The stock price is in a 14.2 month down move. The stock has declined 16.8% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

The stock is currently rated D.
On 12/3/19, Prudential Bancorp Inc (NASDAQ: PBIP) stock suffered a major decline of -99.0%, closing at $0.00. However, trading volume in this decline was exceptionally low at 20% of normal. The stock has performed in line with the market over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, Prudential Bancorp generated a very significant increase in cash of +$20.27 million (+69%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$17.05 million. Non-operating uses consumed -$5.53 million (-32% of EBITDA). Cash taxes consumed -$3.70 million (-22% of EBITDA). Re-investment in the business amounted to -$13.09 million (-77% of EBITDA). On a net basis, debt investors supplied +$40.37 million (+237% of EBITDA) while equity investors received -$14.83 million (-87% of EBITDA).
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Prudential Bancorp’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Prudential Bancorp Inc Peer Group. In most years, Prudential Bancorp was in the third quartile and lower quartile. Currently, Prudential Bancorp is below median at -32% of EBITDA (-$5.53 million).

Prudential Bancorp’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Prudential Bancorp Inc Peer Group. In most years, Prudential Bancorp was in the top quartile and second quartile. Currently, Prudential Bancorp is lower quartile at -22% of EBITDA (-$3.70 million).

Prudential Bancorp’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Prudential Bancorp Inc Peer Group. In most years, Prudential Bancorp was in the top quartile and lower quartile. Currently, Prudential Bancorp is slightly above median at -77% of EBITDA (-$13.09 million).

Prudential Bancorp’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Prudential Bancorp Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Prudential Bancorp was in the top quartile and lower quartile. Currently, Prudential Bancorp is upper quartile at +237% of EBITDA (+$40.37 million).

Prudential Bancorp’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Prudential Bancorp Inc Peer Group. In most years, Prudential Bancorp was in the third quartile and lower quartile. Currently, Prudential Bancorp is lower quartile at -87% of EBITDA (-$14.83 million).

Prudential Bancorp’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Prudential Bancorp Inc Peer Group. (Since 2014 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, Prudential Bancorp was in the top quartile and lower quartile. Currently, Prudential Bancorp is upper quartile at +119% of EBITDA (+$20.27 million).
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Prudential Bancorp’s Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Prudential Bancorp Inc Peer Group. (Since 2015 Cash, %Revenue has experienced a very sharp recovery.) In most years, Prudential Bancorp was in the top quartile and second quartile. Currently, Prudential Bancorp is upper quartile at +133%.

PROFITABILITY

Prudential Bancorp’s return on equity reached a new post-2010 high in 2019.
A major analytical focus for PBIP is a small negative trend in pretax operating return a significantly offset by very strong positive trend in non-operating factors.
The productivity of Prudential Bancorp’s 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 very significant positive influence on return on equity.
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Prudential Bancorp’s return on equity is at the lower quartile (6.8%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is lower quartile (0.6%) reflecting asset turnover that is lower quartile (0.03X) and pretax margin at the lower quartile (24.1%).
Tax “keep” rate (income tax management) is upper quartile (114.3%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (9.24X).

GROWTH RATES

There are no significant differences between Prudential Bancorp’s longer term growth and growth in recent years.
Prudential Bancorp’s historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 5.2% per year.

Total asset growth has been 10.8% per year.

Annual E.P.S. growth has been 29.1% per year.

Equity growth has been 14.0% per year.
No consensus growth rate forecast is available for Prudential Bancorp.
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Relative to the Prudential Bancorp Inc Peer Group, Prudential Bancorp’s historical growth measures are consistently top quartile. E.P.S. growth (29.1%) has been upper quartile. Equity growth (14.0%) has been upper quartile. Revenue growth (5.2%) has been at the upper quartile. Total asset growth (10.8%) has been at the upper quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Prudential Bancorp’s stock price performance has been significantly below market. Between February, 2009 and December, 2019, Prudential Bancorp’s stock price rose +71%; relative to the market, this was a -59% loss. Significant price moves during the period: 1) November, 2011 – June, 2018: +290%; and 2) May, 2009 – June, 2010: -51%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 0.5% 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 0.5% is below median relative to Prudential Bancorp Inc Peer Group.

Current 5-year total return performance of 9.7% is slightly below median relative to the S&P 500 Composite.
Through October, 2019, with slightly below median current 5-year total return of 9.7% relative to S&P 500 Composite, Prudential Bancorp’s total return performance is below median relative to Prudential Bancorp Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, PBIP’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Price/earnings ratio is below median. Price/equity ratio is lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.
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Prudential Bancorp has a major value gap compared to the median valuation. For PBIP to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 9.41X to 5.93X. If PBIP’s ratio of enterprise value/revenue were to fall to 5.93X, its stock price would be lower by $-17 to $0.
For PBIP to fall to lower quartile valuation relative to the Prudential Bancorp Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 9.41X to 5.12X. If PBIP’s ratio of enterprise value/revenue were to fall to 5.12X, its stock price would decline by $-22 from the current level of $18.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be below the cost of capital, PBIP is expected to continue to be a modest Value Eraser.
Prudential Bancorp’s current Price Target of $13 represents a -26% change from the current price of $17.83.
Prudential Bancorp’s low appreciation potential results in an appreciation score of 25 (75% of the universe has greater appreciation potential.)
With this low Appreciation Score of 25, the neutral Power Rating of 56 results in an Value Trend Rating of D.
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Prudential Bancorp’s current Price Target is $13 (+9% from the 2018 Target of $12 but -26% from the 12/03/19 price of $17.83). This slight rise in the Target is the result of a +9% 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 5.1% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is below the 2010 peak of 8%.

PTR’s growth forecast is 17.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2010 and 2018. The current forecast is significantly 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 above the 2011 low of 3.7%.
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At Prudential Bancorp’s current price of $17.83, investors are placing a negative value of $-75 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 16.0% per year, and a return on equity of 5.2% versus a cost of equity of 6.9%.
PTR’s 2020 Price Target of $13 is based on these forecasts and reflects an estimated value of existing assets of $-177 and a value of future investments of $190.

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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