Rating Update: Stock Rating C-Low Neutral (3/20/20)-Wintrust Financial Corp. (WTFC).

out_logo_500#36912.jpg

BUSINESS

Wintrust Financial Corporation operates as a financial holding company in the Chicago metropolitan area, southern Wisconsin, and northwest Indiana. It operates in three segments: Community Banking, Specialty Finance, and Wealth Management. The Community Banking segment offers non-interest bearing deposits, non-brokered interest-bearing transaction accounts, and savings and domestic time deposits; home equity, consumer, and real estate loans; safe deposit facilities; and automatic teller machine (ATM), Internet banking, and other services. It also engages in the origination and purchase of residential mortgages for sale into the secondary market; and provision of lending, deposits, and cash management services to condominium, homeowner, and community associations, as well as asset-based lending for middle-market companies.
out_plist#36912.jpg

INVESTMENT RATING

out_map1#36912.jpg

WTFC’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to continue to be Value Creation neutral.

Wintrust Financial has a current Value Trend Rating of C (Low Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. Wintrust Financial has a neutral Appreciation Score of 57 and a slightly negative Power Rating of 35, triggering the Low Neutral Value Trend Rating.

Wintrust Financial’s stock is selling well below targeted value. The current stock price of $30.62 compares to targeted value 12 months forward of $64.
Wintrust Financial’s neutral appreciation potential results in an appreciation score of 57 (43% of the universe has greater appreciation potential.)
out_pt#36912.jpg

Wintrust Financial has a Power Rating of 35. (This slightly negative Power Rating indicates that WTFC’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: recent price action has been slightly unfavorable; and earnings estimate behavior for WTFC has been slightly negative recently. An offsetting factor is is currently in a modestly favorable positi.

INVESTMENT PROFILE

WTFC’s financial strength is exceptional. Financial strength rating is 95.
out_pfit1#36912.jpg

Relative to the S&P 500 Composite, Wintrust Financial Corp. has moderate Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that WTFC is lower risk. Low earnings variability is a positive for WTFC. Relative weaknesses include: low forecasted profitability, low historical profitability, and low expected growth. WTFC’s valuation is low: median dividend yield, low P/E ratio, and low price/book ratio. WTFC has unusually low market capitalization.

CURRENT SIGNALS

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

Wintrust Financial’s current technical position is very weak. The stock price is in a 21.7 month down move. The stock has declined 40.6% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. Wintrust Financial’s stock price decline is extreme and the stock appears oversold.

ALERTS

. Positive development: the stock rose on very heavy volume. Negative development: negative upside/downside volume developed.
The stock is currently rated C.
On 3/20/20, Wintrust Financial Corp. (NASDAQ: WTFC) stock suffered a major decline of -11.0%, closing at $15.98. Moreover, trading volume in this decline was exceptionally high at 279% of normal. The stock has been weak relative to the market over the last nine months and has declined -13.1% during the last week.

CASH FLOW

In 2019, Wintrust Financial generated a very significant increase in cash of +$959.2 million (+64%). Sources of cash were much larger than uses. Cash generated from 2019 EBITDA totalled +$745.2 million. Non-operating uses consumed -$265.1 million (-36% of EBITDA). Cash taxes consumed -$124.4 million (-17% of EBITDA). Re-investment in the business amounted to -$231.8 million (-31% of EBITDA). On a net basis, debt investors furnished +$767.3 million (+103% of EBITDA) while equity investors furnished +$68.0 million (+9% of EBITDA).
out_cflow.1#36912.jpg

Wintrust Financial’s Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Wintrust Financial Corp. Peer Group. In most years, Wintrust Financial was in the second quartile and lower quartile. Currently, Wintrust Financial is lower quartile at -36% of EBITDA (-$265.1 million).

Wintrust Financial’s Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Wintrust Financial Corp. Peer Group as well. In most years, Wintrust Financial was in the third quartile and lower quartile. Currently, Wintrust Financial is at the lower quartile at -17% of EBITDA (-$124.4 million).

Wintrust Financial’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Wintrust Financial Corp. Peer Group. In most years, Wintrust Financial was in the top quartile and third quartile. Currently, Wintrust Financial is upper quartile at -31% of EBITDA (-$231.8 million).

Wintrust Financial’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Wintrust Financial Corp. Peer Group. In most years, Wintrust Financial was in the top quartile and second quartile. Currently, Wintrust Financial is above median at +103% of EBITDA (+$767.3 million).

Wintrust Financial’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Wintrust Financial Corp. Peer Group. In most years, Wintrust Financial was in the second quartile and top quartile. Currently, Wintrust Financial is at median at +9% of EBITDA (+$68.0 million).

Wintrust Financial’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Wintrust Financial Corp. Peer Group. (Since 2017 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Wintrust Financial was in the top quartile and lower quartile. Currently, Wintrust Financial is upper quartile at +129% of EBITDA (+$959.2 million).
out_cflow.2#36912.jpg

Wintrust Financial’s Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Wintrust Financial Corp. Peer Group. (Since 2015 Cash, %Revenue has experienced a very sharp recovery.) In most years, Wintrust Financial was in the second quartile and top quartile. Currently, Wintrust Financial is upper quartile at +137%.

PROFITABILITY

Wintrust Financial’s return on equity reached a new post-2010 low in 2019.
This was due to very strong positive trend in pretax operating return and small positive trend in non-operating factors.
The productivity of Wintrust Financial’s assets remained stable over the full period 2010-2019: asset turnover has exhibited little to no overall change.
Additionally, pretax margin enjoyed a very strong overall uptrend that sharply decelerated from the 2013 level.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
out_dpgrfs3#36912.jpg

Wintrust Financial’s return on equity is at median (10.0%) for the four quarters ended December, 2019.
out_dpgrfs3.2#36912.jpg
Operating performance (pretax return on assets) is lower quartile (1.3%) reflecting asset turnover that is above median (0.05X) and lower quartile pretax margin (26.8%).
Tax “keep” rate (income tax management) is at the lower quartile (74.1%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (10.27X).

GROWTH RATES

There are no significant differences between Wintrust Financial’s longer term growth and growth in recent years.
Wintrust 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 4.3% per year. (More recently it has been 8.8%.)

Total asset growth has been 4.6% per year.

Annual E.P.S. growth has been 15.5% per year.

Equity growth has been 4.9% per year.
No consensus growth rate forecast is available for Wintrust Financial.
out_growthgrf#36912.jpg

Relative to the Wintrust Financial Corp. Peer Group, Wintrust Financial’s historical growth measures are erratic. E.P.S. growth (15.5%) has been at the upper quartile. Revenue growth (4.3%) has been substantially above median. Total asset growth (4.6%) has been at median. Equity growth (4.9%) has been lower quartile.

Consensus growth forecast is unavailable.
out_growthgrf.2#36912.jpg

PRICE HISTORY

Over the full time period, Wintrust Financial’s stock price performance has been variable and below market. Between May, 2009 and March, 2020, Wintrust Financial’s stock price rose +70%; relative to the market, this was a -32% loss. Significant price moves during the period: 1) May, 2018 – March, 2020: -67%; 2) January, 2016 – May, 2018: +119%; and 3) September, 2011 – July, 2015: +109%.
out_price#36912.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of -26.3% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2020 of -26.3% is lower quartile relative to Wintrust Financial Corp. Peer Group.

Current 5-year total return performance of 3.6% is below median relative to the S&P 500 Composite.
Through February, 2020, with below median current 5-year total return of 3.6% relative to S&P 500 Composite, Wintrust Financial’s total return performance is lower quartile relative to Wintrust Financial Corp. Peer Group.
out_quartret#36912.jpg

VALUATION BENCHMARKS

Relative to S&P 500 Composite, WTFC’s overall valuation is exceptionally low. All five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/revenue, then by the price/equity ratio, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor is the ratio of enterprise value/assets.

Relative to Wintrust Financial Corp. Peer Group, WTFC’s overall valuation is exceptionally low. All five factors are upper quartile. The highest factor is the price/earnings ratio, followed by the price/equity ratio, then by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/revenue. The lowest factor is the ratio of enterprise value/assets.
out_tradv#36912.jpg

Wintrust Financial has a major value gap compared to the median. For WTFC to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.72X to 2.41X. If WTFC’s ratio of enterprise value/revenue were to rise to 2.41X, its stock price would be higher by $53 to $84.
For WTFC to achieve upper quartile valuation relative to the Wintrust Financial Corp. Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.72X to 3.51X. If WTFC’s ratio of enterprise value/revenue were to rise to 3.51X, its stock price would increase by $87 from the current level of $31.

VALUE TARGETS

WTFC’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to continue to be Value Creation neutral.
Wintrust Financial’s current Price Target of $64 represents a +108% change from the current price of $30.62.
This neutral appreciation potential results in an appreciation score of 57 (43% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 57, the moderately low Power Rating of 35 contributes to an Value Trend Rating of C.
out_vc#36912.jpg

Wintrust Financial’s current Price Target is $64 (-26% from the 2019 Target of $86 but +108% from the 03/20/20 price of $30.62). This fall in the Target is the result of a +16% increase in the equity base and a -37% 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 large negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
out_wc.1#36912.jpg
out_wc.2#36912.jpg

PTR’s return on equity forecast is 8.3% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, steady increase between 2011 and 2019. The current forecast is above the 2011 low of 5%.

PTR’s growth forecast is 18.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2011 and 2019. The current forecast is significantly above the 2015 low of 2%.

PTR’s cost of equity forecast is 9.0% — in line with recent levels. Forecasted cost of equity suffered a dramatic, variable increase between 2011 and 2019. The current forecast is above the 2013 low of 6.1%.
out_vc.2#36912.jpg
At Wintrust Financial’s current price of $30.62, investors are placing a negative value of $-44 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 11.0% per year, and a return on equity of 9.0% versus a cost of equity of 8.2%.
PTR’s 2021 Price Target of $64 is based on these forecasts and reflects an estimated value of existing assets of $80 and a value of future investments of $-17.

About John Lafferty 69930 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.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.