Rating Update: Stock Rating B-Positive (3/20/20)-Flagstar Bancorp Inc (FBC).

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BUSINESS

Flagstar Bancorp, Inc. operates as a savings and loan holding company for Flagstar Bank, FSB that provides commercial, small business, and consumer banking services to individuals and businesses in the United States. Its Community Banking segment offers various products, such as checking accounts, savings accounts, money market accounts, certificates of deposit, consumer and commercial loans, commercial real estate loans, equipment finance and leasing, home builder finance loans, and warehouse lines of credit. It also provides other financial services, including consumer and corporate card services, customized treasury management solutions, merchant services, and capital markets services, such as loan syndications, as well as wealth management products and services.
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INVESTMENT RATING

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FBC’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.

Flagstar Bancorp has a current Value Trend Rating of B (Positive).
The Value Trend Rating reflects consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Flagstar Bancorp has a slightly positive Power Rating of 60 and a good Appreciation Score of 77, producing the Positive Value Trend Rating.

Flagstar Bancorp’s stock is selling well below targeted value. The current stock price of $18.80 compares to targeted value 12 months forward of $55.
Flagstar Bancorp’s high appreciation potential results in an appreciation score of 77 (only 23% of the universe has greater appreciation potential.)
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Flagstar Bancorp has a Power Rating of 60. (This slightly positive Power Rating indicates that FBC’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 in a strong phase current; and the recent trend in FBC’s earnings estimates has been favorable. An offsetting factor is recent price action has been neutral.

INVESTMENT PROFILE

FBC’s financial strength is high. Financial strength rating is 81.
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Relative to the S&P 500 Composite, Flagstar Bancorp Inc has moderate Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that FBC is higher risk. All factors are relative weaknesses. Relative weaknesses for FBC include: low forecasted profitability, low historical profitability, high stock price volatility, low expected growth, and high earnings variability. FBC’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. FBC has unusually low market capitalization.

CURRENT SIGNALS

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

Flagstar Bancorp’s current technical position is very weak. The stock price is in a 3.0 month down move. The stock has declined 34.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. Flagstar Bancorp’s stock price decline is extreme and the stock appears oversold.

ALERTS

Significant negative changes in investment behavior have recently occurred for Flagstar Bancorp Inc (NYSE: FBC): negative upside/downside volume developed.
Marginal positive changes in Flagstar Bancorp Inc (NYSE: FBC) fundamentals have recently occurred: significant quarterly sales acceleration occurred.
The stock is currently rated B.
On 3/20/20, Flagstar Bancorp Inc (NYSE: FBC) stock suffered a major decline of -21.5%, closing at $1.46. Moreover, this decline was accompanied by unusually high trading volume at 171% of normal. The stock has performed in line with the market over the last nine months and has declined -26.4% during the last week.

CASH FLOW

In 2019, Flagstar Bancorp generated an increase in cash of +$18.0 million (+4%). Sources of cash were very slightly larger than uses. Cash generated from 2019 EBITDA totalled +$505.0 million. Non-operating uses consumed -$169.0 million (-33% of EBITDA). Cash taxes consumed -$48.0 million (-10% of EBITDA). Re-investment in the business amounted to -$1,715.0 million (-340% of EBITDA). On a net basis, debt investors contributed +$1,445.0 million (+286% of EBITDA) while in 2019, equity investors had no impact on cash.
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Flagstar Bancorp’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Flagstar Bancorp Inc Peer Group. In most years, Flagstar Bancorp was in the second quartile and lower quartile. Currently, Flagstar Bancorp is slightly above median at -33% of EBITDA (-$169.0 million).

Flagstar Bancorp’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Flagstar Bancorp Inc Peer Group. (Since 2017 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, Flagstar Bancorp was in the top quartile and second quartile. Currently, Flagstar Bancorp is above median at -10% of EBITDA (-$48.0 million).

Flagstar 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 Flagstar Bancorp Inc Peer Group. In most years, Flagstar Bancorp was in the top quartile and lower quartile. Currently, Flagstar Bancorp is substantially below median at -340% of EBITDA (-$1,715.0 million).

Flagstar Bancorp’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Flagstar Bancorp Inc Peer Group. In most years, Flagstar Bancorp was in the top quartile and lower quartile. Currently, Flagstar Bancorp is upper quartile at +286% of EBITDA (+$1,445.0 million).

Flagstar Bancorp’s Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Flagstar Bancorp Inc Peer Group. In most years, Flagstar Bancorp was in the second quartile and third quartile. Currently, Flagstar Bancorp is upper quartile at 0% of EBITDA ( $0.0 million).

Flagstar Bancorp’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Flagstar Bancorp Inc Peer Group. In most years, Flagstar Bancorp was in the third quartile and second quartile. Currently, Flagstar Bancorp is slightly below median at +4% of EBITDA (+$18.0 million).
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Flagstar Bancorp’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Flagstar Bancorp Inc Peer Group. (Since 2016 Cash, %Revenue has experienced a very sharp recovery.) In most years, Flagstar Bancorp was in the lower quartile. Currently, Flagstar Bancorp is lower quartile at +30%.

PROFITABILITY

Flagstar Bancorp’s return on equity reached a new post-2012 low in 2019.
Flagstar Bancorp’s very strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors is a major performance consideration.
The productivity of Flagstar Bancorp’s assets declined over the full period 2010-2019: asset turnover has suffered a strong overall downtrend.
More than offsetting this trend, however, pretax margin enjoyed a very strong overall uptrend but it experienced a very sharp decline after the 2015 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Flagstar Bancorp’s return on equity is at the upper quartile (12.2%) for the four quarters ended December, 2019.
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Operating performance (pretax return on assets) is substantially below median (1.1%) reflecting asset turnover that is slightly above median (0.06X) and lower quartile pretax margin (18.9%).
Tax “keep” rate (income tax management) is at median (82.0%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is upper quartile (13.01X).

GROWTH RATES

Overall, Flagstar Bancorp’s growth rate has slowed very considerably in recent years.
Flagstar Bancorp’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 24.2% per year. (More recently it has been 3.3%.)

Total asset growth has been 28.3% per year. (More recently it has been 10.5%.)

Annual E.P.S. growth has been -2.1% per year. (More recently it has been 46.9%.)

Equity growth has been 29.7% per year. (More recently it has been 8.1%.)
No consensus growth rate forecast is available for Flagstar Bancorp.
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Relative to the Flagstar Bancorp Inc Peer Group, Flagstar Bancorp’s historical growth measures are generally top quartile. Revenue growth (24.2%) has been upper quartile. Total asset growth (28.3%) has been upper quartile. Equity growth (29.7%) has been upper quartile. E.P.S. growth (-2.1%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Flagstar Bancorp’s stock price performance has been volatile and significantly below market. Between May, 2009 and March, 2020, Flagstar Bancorp’s stock price fell -80%; relative to the market, this was a -92% loss. Significant price moves during the period: 1) December, 2019 – March, 2020: -51%; 2) January, 2016 – November, 2017: +104%; 3) May, 2012 – December, 2012: +155%; 4) February, 2011 – September, 2011: -72%; and 5) September, 2009 – November, 2010: -88%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -1.9% 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 February, 2020 of -1.9% is substantially above median relative to Flagstar Bancorp Inc Peer Group.

Current 5-year total return performance of 16.7% is upper quartile relative to the S&P 500 Composite.
Through February, 2020, with upper quartile current 5-year total return of 16.7% relative to S&P 500 Composite, Flagstar Bancorp’s total return performance is upper quartile relative to Flagstar Bancorp Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, FBC’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 upper quartile. 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 Flagstar Bancorp Inc Peer Group, FBC’s overall valuation is high. 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. Ratio of enterprise value/assets is at the upper quartile. Price/equity ratio is above median. The lowest factor, the price/earnings ratio, is at the lower quartile.
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Flagstar Bancorp has a major value gap compared to the median valuation. For FBC to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 4.25X to 2.73X. If FBC’s ratio of enterprise value/revenue were to fall to 2.73X, its stock price would be lower by $-38 to $-19.
For FBC to fall to lower quartile valuation relative to the Flagstar Bancorp Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 4.25X to 2.28X. If FBC’s ratio of enterprise value/revenue were to fall to 2.28X, its stock price would decline by $-49 from the current level of $19.

VALUE TARGETS

FBC’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a modest Value Builder.
Flagstar Bancorp’s current Price Target of $60 represents a +219% change from the current price of $18.80.
This high appreciation potential results in an appreciation score of 77 (only 23% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 77, the moderately high Power Rating of 60 contributes to an Value Trend Rating of B.
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Flagstar Bancorp’s current Price Target is $60 (+10% from the 2019 Target of $55 and +219% from the 03/20/20 price of $18.80). This slight rise in the Target is the result of a +23% increase in the equity base and a -11% decrease in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in return on equity has a very 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 10.7% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2011 and 2019. The current forecast is significantly below the 2012 peak of 21%.

PTR’s growth forecast is 15.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2015 and 2019. The current forecast is well above the 2015 low of 6%.

PTR’s cost of equity forecast is 9.7% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2011 and 2019. The current forecast is above the 2014 low of 5.5%.
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At Flagstar Bancorp’s current price of $18.80, investors are placing a negative value of $-23 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 12.0% per year, and a return on equity of 10.8% versus a cost of equity of 9.1%.
PTR’s 2021 Price Target of $60 is based on these forecasts and reflects an estimated value of existing assets of $31 and a value of future investments of $29.

About John Lafferty 69924 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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