Rating Update: Stock Rating Z-unrated (12/6/19)-Stewardship Financial Corp (SSFN).

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BUSINESS

Stewardship Financial Corporation operates as the bank holding company for Atlantic Stewardship Bank that provides various commercial and retail banking products and services for small and medium-sized businesses, professionals, and individuals. The company offers various deposits, such as personal and business checking accounts, time deposits, money market accounts, regular savings accounts, certificates of deposit, and term certificate accounts. It also offers various loans consisting of commercial, consumer, residential real estate and mortgage, home equity, personal, construction, automobile, home improvement, and unsecured loans. The company, through its other subsidiaries, is involved in owning and managing an investment portfolio; and insurance business.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, SSFN is expected to continue to be a Value Builder.

Stewardship Finl is currently unrated.

Stewardship Finl’s targeted value is not available.
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Stewardship Finl’s Power Rating is not available.

INVESTMENT PROFILE

SSFN’s financial strength is high. Financial strength rating is 78.
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Relative to the S&P 500 Composite, Stewardship Financial Corp has moderate Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that SSFN is normal risk. High historical growth is a positive for SSFN. Relative weaknesses include: low forecasted profitability, low historical profitability, and low expected growth. SSFN’s valuation is moderate: low dividend yield, and low P/E ratio. SSFN has unusually low market capitalization.

CURRENT SIGNALS

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

Stewardship Finl’s current technical position is moderately positive. The stock price is in a 7.9 month up move. The stock has appreciated 84.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend. Stewardship Finl’s stock price decline is extreme and the stock appears oversold.

ALERTS

Stewardship Financial Corp (NASDAQ: SSFN) has benefited from notable positive changes in investment behavior: positive upside/downside volume developed.
The stock is currently unrated.
On 12/6/19, Stewardship Financial Corp (NASDAQ: SSFN) stock enjoyed a major increase of 12.9%, closing at $2.36. Relative to the market the stock has been extremely weak over the last nine months.

CASH FLOW

In 2018, Stewardship Finl experienced a significant decline in cash of -$4.45 million (-21%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$18.11 million. Non-operating uses consumed -$6.59 million (-36% of EBITDA). Cash taxes consumed -$3.02 million (-17% of EBITDA). Re-investment in the business amounted to -$13.41 million (-74% of EBITDA). On a net basis, debt investors provided +$2.01 million (+11% of EBITDA) while equity investors removed -$1.54 million (-9% of EBITDA).
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Stewardship Finl’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 Stewardship Financial Corp Peer Group. (Since 2012 Non-operating Income, %EBITDA has accelerated.) In most years, Stewardship Finl was in the lower quartile and third quartile. Currently, Stewardship Finl is lower quartile at -36% of EBITDA (-$6.59 million).

Stewardship Finl’s Cash Taxes, %EBITDA experienced a strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Stewardship Financial Corp Peer Group. In most years, Stewardship Finl was in the top quartile and second quartile. Currently, Stewardship Finl is at the lower quartile at -17% of EBITDA (-$3.02 million).

Stewardship Finl’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Stewardship Financial Corp Peer Group. (Since 2016 Business Re-investment, %EBITDA has experienced a very sharp recovery.) In most years, Stewardship Finl was in the top quartile and second quartile. Currently, Stewardship Finl is substantially above median at -74% of EBITDA (-$13.41 million).

Stewardship Finl’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Stewardship Financial Corp Peer Group. (Since 2016 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, Stewardship Finl was in the lower quartile and second quartile. Currently, Stewardship Finl is lower quartile at +11% of EBITDA (+$2.01 million).

Stewardship Finl’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Stewardship Financial Corp Peer Group. In most years, Stewardship Finl was in the lower quartile and second quartile. Currently, Stewardship Finl is below median at -9% of EBITDA (-$1.54 million).

Stewardship Finl’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Stewardship Financial Corp Peer Group. In most years, Stewardship Finl was in the third quartile and second quartile. Currently, Stewardship Finl is lower quartile at -25% of EBITDA (-$4.45 million).
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Stewardship Finl’s Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Stewardship Financial Corp Peer Group. In most years, Stewardship Finl was in the lower quartile. Currently, Stewardship Finl is substantially below median at +43%.

PROFITABILITY

SSFN’s return on equity has improved very significantly since 2009.
This very significant improvement was due to very strong positive trend in pretax operating return and very small negative trend in non-operating factors.
The productivity of SSFN’s assets declined over the full period 2009-2019: asset turnover has suffered a strong overall downtrend.
More than offsetting this trend, however, pretax margin enjoyed a very strong overall uptrend that decelerated very sharply from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
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SSFN’s return on equity is below median (8.3%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (1.0%) reflecting asset turnover that is lower quartile (0.04X) and pretax margin at the lower quartile (23.3%).
Tax “keep” rate (income tax management) is lower quartile (72.6%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (11.47X).

GROWTH RATES

There are no significant differences between Stewardship Financial’s longer term growth and growth in recent years.
Stewardship Financial’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 -4.0% per year.

Total asset growth has been -0.4% per year.

Annual E.P.S. growth has been 28.8% per year.

Equity growth has been 3.1% per year.
No consensus growth rate forecast is available for Stewardship Financial.
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Relative to the Stewardship Financial Corp Peer Group, Stewardship Finl’s historical growth measures are generally lower quartile. E.P.S. growth (28.8%) has been at the upper quartile. Total asset growth (-0.4%) has been lower quartile. Revenue growth (-4.0%) has been lower quartile. Equity growth (3.1%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Between February, 2009 and December, 2019, Stewardship Financial’s . Significant price moves during the period: 1) October, 2014 – May, 2018: +183%; and 2) October, 2010 – November, 2012: -52%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 65.8% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of 65.8% is upper quartile relative to Stewardship Financial Corp Peer Group.

Current 5-year total return performance of 31.7% is upper quartile relative to the S&P 500 Composite.
Through October, 2019, with upper quartile current 5-year total return of 31.7% relative to S&P 500 Composite, Stewardship Finl’s total return performance is upper quartile relative to Stewardship Financial Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, SSFN’s overall valuation is low. The highest factor, the ratio of enterprise value/revenue, is near the upper quartile. Ratio of enterprise value/earnings before interest and taxes is above median. 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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Stewardship Finl has a large value gap compared to the median valuation. For SSFN to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 5.27X to 4.70X. If SSFN’s ratio of enterprise value/revenue were to fall to 4.70X, its stock price would be lower by $-3 to $13.
For SSFN to fall to lower quartile valuation relative to the Stewardship Financial Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 5.27X to 3.85X. If SSFN’s ratio of enterprise value/revenue were to fall to 3.85X, its stock price would decline by $-7 from the current level of $16.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, SSFN is expected to continue to be a Value Builder.
Stewardship Financial’s current Price Target of $19 represents a -3,946% change from the current price of $ NA.
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Stewardship Financial’s current Price Target is $19 (+5% from the 2018 Target of $18 but -3,946% from the 12/06/19 price of $ NA). This plateau in the Target is the result of a +3% increase in the equity base and a +2% increase in the price/equity multiple. The forecasted increase in growth has a large positive impact on the price/equity multiple and the forecasted increase in return on equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 10.0% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, variable increase between 2010 and 2018. The current forecast is well above the 2012 low of 4%.

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 2013 low of 2%.

PTR’s cost of equity forecast is 6.3% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is steady at the 2012 low of 4.8%.
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At Stewardship Financial’s current price of $-NaN, investors are placing -Na on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 2.0% per year, and a return on equity of 9.6% versus a cost of equity of 5.7%.
PTR’s 2020 Price Target of $19 is based on these forecasts and reflects an estimated value of existing assets of $16 and a value of future investments of $4.

About John Lafferty 58188 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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