BUSINESS
1st Source Corporation operates as the bank holding company for 1st Source Bank that provides commercial and consumer banking services, trust and wealth advisory services, and insurance products to individual and business clients. Its consumer banking services include checking and savings accounts; certificates of deposit; individual retirement accounts; online and mobile banking products; consumer loans, real estate mortgage loans, and home equity lines of credit; and financial planning, financial literacy, and other consultative services, as well as debit and credit cards.
INVESTMENT RATING
SRCE is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
1st Source has a current Value Trend Rating of A (Highest Rating).
The Value Trend Rating reflects consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. 1st Source has a good Appreciation Score of 72 and a very high Power Rating of 88, resulting in the Highest Value Trend Rating.
1st Source’s stock is selling well below targeted value. The current stock price of $51.44 compares to targeted value 12 months forward of $100.
1st Source’s high appreciation potential results in an appreciation score of 72 (only 28% of the universe has greater appreciation potential.)
1st Source has a Power Rating of 88. (SRCE’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 12% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in SRCE’s earnings estimates has been extremely favorable; recent price action has been favorable; and the Commercial Banks comparison group is in a strong phase currently.
INVESTMENT PROFILE
1st Source’s financial strength is exceptional. Financial strength rating is 96.
Relative to the S&P 500 Composite, 1st Source Corp has moderate Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that SRCE is extremely low risk. Relative weaknesses include: low forecasted profitability, and low expected growth. 1st Source’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. SRCE has unusually low market capitalization.
CURRENT SIGNALS
1st Source’s current operations are stable. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.
1st Source’s current technical position is very strong. The stock price is in a 7.5 month up move. The stock has appreciated 33.1% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
1st Source Corp (NASDAQ: SRCE) has benefited from notable positive changes in fundamentals: significant quarterly earnings acceleration occurred, and significant quarterly sales acceleration occurred.
The stock is currently rated A.
On 4/1/24, 1st Source Corp (NASDAQ: SRCE) stock declined modestly by -1.9%, closing at $51.44. However, this decline was accompanied by below average trading volume at 72% of normal. Relative to the market the stock has been strong over the last nine months and has risen 1.2% during the last week.
CASH FLOW
In 2023, 1st Source generated a slight increase in cash of +$6.9 million (+6%). Sources of cash were slightly larger than uses. Cash generated from 2023 EBITDA totaled +$231.0 million. Non-operating uses consumed -$57.0 million (-25% of EBITDA). Cash taxes consumed -$36.7 million (-16% of EBITDA). Re-investment in the business amounted to -$229.0 million (-99% of EBITDA). On a net basis, debt investors furnished +$98.0 million (+42% of EBITDA) while equity investors furnished +$0.6 million (+0% of EBITDA).
1st Source’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the 1st Source Peer Group. (Since 2021 Non-operating Income, %EBITDA has accelerated sharply.) In most years, 1st Source was in the top quartile. Currently, 1st Source is upper quartile at -25% of EBITDA (-$57.0 million).
1st Source’s Cash Taxes, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by a similar trend for the 1st Source Peer Group. In most years, 1st Source was in the lower quartile and third quartile. Currently, 1st Source is lower quartile at -16% of EBITDA (-$36.7 million).
1st Source’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the 1st Source Peer Group. In most years, 1st Source was in the second quartile and top quartile. Currently, 1st Source is slightly below median at -99% of EBITDA (-$229.0 million).
1st Source’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the 1st Source Peer Group. In most years, 1st Source was in the lower quartile and top quartile. Currently, 1st Source is at median at +42% of EBITDA (+$98.0 million).
1st Source’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the 1st Source Peer Group. In most years, 1st Source was in the second quartile and lower quartile. Currently, 1st Source is slightly above median at +0% of EBITDA (+$0.6 million).
1st Source’s Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the 1st Source Peer Group. In most years, 1st Source was in the second quartile and lower quartile. Currently, 1st Source is at median at +3% of EBITDA (+$6.9 million).
1st Source’s Cash, %Revenue has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the 1st Source Peer Group. (Since 2021 Cash, %Revenue has experienced a very sharp decline.) In most years, 1st Source was in the lower quartile. Currently, 1st Source is lower quartile at +26%.
PROFITABILITY
1st Source’s return on equity has improved very significantly since 2014. The current level of 12.6% is 1.34X the low for the period and is -9.5% from the high.
This very significant improvement was due to very small positive trend in pretax operating return supported by strong positive trend in non-operating factors.
The productivity of 1st Source’s assets remained stable over the full period 2014-2023: asset turnover has exhibited little to no overall change although it experienced very sharp improvement from the 2021 level.
Additionally, pretax margin has exhibited a volatile overall uptrend even as it experienced a very sharp decline after the 2021 high.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
1st Source’s return on equity is upper quartile (12.6%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is upper quartile (1.9%) reflecting asset turnover that is upper quartile (0.06X) and pretax margin at the upper quartile (31.9%).
Tax “keep” rate (income tax management) is at median (77.3%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is at median (8.82X).
GROWTH RATES
There are no significant differences between 1st Source’s longer term growth and growth in recent years.
1st Source’s 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 7.1% per year. (More recently it has been 14.6%.)
Total asset growth has been 7.0% per year.
Annual E.P.S. growth has been 9.6% per year. (More recently it has been -0.6%.)
Equity growth has been 5.4% per year.
No consensus growth rate forecast is available for 1st Source.
Relative to the 1st Source Peer Group, 1st Source’s historical growth measures are erratic. E.P.S. growth (9.6%) has been at the upper quartile. Total asset growth (7.0%) has been at the upper quartile. Revenue growth (7.1%) has been above median. Equity growth (5.4%) has been below median.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, 1st Source’s stock price performance has been below market. Between June, 2013 and April, 2024, 1st Source’s stock price rose +138%; relative to the market, this was a -27% loss.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 2.8% 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, 2024 of 2.8% is upper quartile relative to 1st Source Corp Peer Group.
Current 5-year total return performance of 3.7% is substantially below median relative to the S&P 500 Composite.
Through February, 2024, with substantially below median current 5-year total return of 3.7% relative to S&P 500 Composite, 1st Source’s total return performance is upper quartile relative to 1st Source Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, SRCE’s overall valuation is quite low. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/revenue, followed by the ratio of enterprise value/earnings before interest and taxes, then by the price/earnings ratio, then by the price/equity ratio. The lowest factor, ratio of enterprise value/assets, is lower quartile.
Relative to 1st Source Peer Group, SRCE’s overall valuation is low. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/assets is at median. Price/earnings ratio is at the lower quartile. Ratio of enterprise value/revenue is at the lower quartile. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is lower quartile.
1st Source has a minor value gap compared to the median valuation. For SRCE to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 3.34X to 3.56X. If SRCE’s ratio of enterprise value/revenue were to rise to 3.56X, its stock price would be lower by $4 to $56.
For SRCE to hit lower quartile valuation relative to the 1st Source Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.34X to 3.33X. If SRCE’s ratio of enterprise value/revenue were to fall to 3.33X, its stock price would decline by $-0 from the current level of $51.
VALUE TARGETS
SRCE is expected to continue to be a modest Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
1st Source’s current Price Target of $104 represents a +102% change from the current price of $51.44.
This high appreciation potential results in an appreciation score of 72 (only 28% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 72, the high Power Rating of 88 contributes to an Value Trend Rating of A.
1st Source’s current Price Target is $104 (+7% from the 2023 Target of $97 and +102% from the 04/01/24 price of $51.44). This slight rise in the Target is the result of a +13% increase in the equity base and a -6% decrease in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a large positive impact.
PTR’s return on equity forecast is 9.7% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is steady at the 2016 low of 8%.
PTR’s growth forecast is 10.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2015 and 2023. The current forecast is well above the 2015 low of 1%.
PTR’s cost of equity forecast is 6.9% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2015 and 2023. The current forecast is steady at the 2016 low of 5.6%.
At 1st Source’s current price of $51.44, investors are placing a negative value of $-4 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 10.6% versus a cost of equity of 7.4%.
PTR’s 2025 Price Target of $104 is based on these forecasts and reflects an estimated value of existing assets of $64 and a value of future investments of $40.
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