BUSINESS
Arrow Financial Corporation, a bank holding company, provides commercial and consumer banking, and financial products and services. The company’s deposit products include demand deposits, interest-bearing checking accounts, savings deposits, time deposits, and other time deposits. Its lending activities comprise commercial loans, such as term loans, time notes, and lines of credit; and commercial real estate loans to finance real estate purchases, refinancing, expansions, and improvements to commercial properties, as well as commercial construction and land development loans to finance projects.
INVESTMENT RATING
AROW is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Arrow Financial has a current Value Trend Rating of A (Highest Rating).
The Value Trend Rating reflects complementary signals from PTR’s two proprietary measures of a stock’s attractiveness. Arrow Financial has a slightly positive Appreciation Score of 66 and a very high Power Rating of 88, with the Highest Value Trend Rating the result.
Arrow Financial’s stock is selling well below targeted value. The current stock price of $23.54 compares to targeted value 12 months forward of $41.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
Arrow Financial has a Power Rating of 88. (AROW’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: recent price action has been extremely favorable; and the Commercial Banks comparison group is in a strong phase currently. An offsetting factor is the trend in AROW’s earnings estimates has been unfavorable in recent months.
INVESTMENT PROFILE
AROW’s financial strength is exceptional. Financial strength rating is 92.
Relative to the S&P 500 Composite, Arrow Financial Corp has moderate Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that AROW is extremely low risk. Relative weaknesses include: low forecasted profitability, and low expected growth. AROW’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. AROW has unusually low market capitalization.
CURRENT SIGNALS
Arrow Financial’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.
Arrow Financial’s current technical position is mixed. The stock price is in a 3.5 month down move. The stock has declined 15.3% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average.
ALERTS
Arrow Financial Corp (NASDAQ: AROW) has benefited from small positive changes in fundamentals: significant quarterly sales acceleration occurred.
The stock is currently rated A.
On 4/8/24, Arrow Financial Corp (NASDAQ: AROW) stock rose slightly by 0.3%, closing at $23.54. However, this advance was accompanied by exceptionally low trading volume at 35% of normal. Relative to the market the stock has been exceptionally strong over the last nine months but has declined -5.9% during the last week.
CASH FLOW
In 2023, Arrow Financial generated a very significant increase in cash of +$77.88 million (+120%). Sources of cash were much larger than uses. Cash generated from 2023 EBITDA totaled +$76.35 million. Non-operating uses consumed -$32.11 million (-42% of EBITDA). Cash taxes consumed -$7.45 million (-10% of EBITDA). Withdrawal of investment from the business totaled +$73.95 million (+97% of EBITDA). On a net basis, debt investors received -$29.02 million (-38% of EBITDA) while equity investors removed -$3.84 million (-5% of EBITDA).
Arrow Financial’s Non-operating Income, %EBITDA has experienced a minor downtrend over the period. This downtrend was accompanied by stability for the Arrow Financial Peer Group. (Since 2020 Non-operating Income, %EBITDA has acccelerated.) In most years, Arrow Financial was in the second quartile and top quartile. Currently, Arrow Financial is lower quartile at -42% of EBITDA (-$32.11 million).
Arrow Financial’s Cash Taxes, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by a similar trend for the Arrow Financial Peer Group. In most years, Arrow Financial was in the second quartile and top quartile. Currently, Arrow Financial is upper quartile at -10% of EBITDA (-$7.45 million).
Arrow Financial’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Arrow Financial Peer Group. In most years, Arrow Financial was in the top quartile and second quartile. Currently, Arrow Financial is upper quartile at +97% of EBITDA (+$73.95 million).
Arrow Financial’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Arrow Financial Peer Group. In most years, Arrow Financial was in the top quartile and lower quartile. Currently, Arrow Financial is lower quartile at -38% of EBITDA (-$29.02 million).
Arrow Financial’s Equity Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Arrow Financial Peer Group. In most years, Arrow Financial was in the second quartile and top quartile. Currently, Arrow Financial is above median at -5% of EBITDA (-$3.84 million).
Arrow Financial’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Arrow Financial Peer Group. In most years, Arrow Financial was in the second quartile and top quartile. Currently, Arrow Financial is upper quartile at +102% of EBITDA (+$77.88 million).
Arrow Financial’s Cash, %Revenue has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Arrow Financial Peer Group. In most years, Arrow Financial was in the second quartile and top quartile. Currently, Arrow Financial is substantially above median at +74%.
PROFITABILITY
Arrow Financial’s return on equity has eroded significantly since 2014. The current level of 7.9% is at the low for the period and is -31.9% from the high.
This significant erosion was due to strong negative trend in pretax operating return and very minor positive trend in non-operating factors.
The productivity of Arrow Financial’s assets rose over the full period 2014-2023: asset turnover has exhibited a volatile overall uptrend that sharply accelerated after the 2021 level.
More than offsetting this trend, however, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2021 level.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
Arrow Financial’s return on equity is lower quartile (7.9%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is lower quartile (0.9%) reflecting asset turnover that is at the lower quartile (0.05X) and lower quartile pretax margin (19.6%).
Tax “keep” rate (income tax management) is at median (80.2%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the upper quartile (10.98X).
GROWTH RATES
There are no significant differences between Arrow Financial’s longer term growth and growth in recent years.
Arrow Financial’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.
Total asset growth has been 6.5% per year.
Annual E.P.S. growth has been 5.0% per year. (More recently it has been -12.3%.)
Equity growth has been 6.8% per year.
No consensus growth rate forecast is available for Arrow Financial.
Relative to the Arrow Financial Peer Group, Arrow Financial’s historical growth measures are erratic. Equity growth (6.8%) has been upper quartile. Revenue growth (7.1%) has been at the upper quartile. Total asset growth (6.5%) has been at median. E.P.S. growth (5.0%) has been below median.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Arrow Financial’s stock price performance has been variable and significantly below market. Between June, 2013 and April, 2024, Arrow Financial’s stock price rose +28%; relative to the market, this was a -61% loss. Significant price move during the period: 1) November, 2022 – September, 2023: -50%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -13.8% 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, 2024 of -13.8% is slightly above median relative to Arrow Financial Corp Peer Group.
Current 5-year total return performance of -1.2% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of -1.2% relative to S&P 500 Composite, Arrow Financial’s total return performance is below median relative to Arrow Financial Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, AROW’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 Arrow Financial Peer Group, AROW’s overall valuation is low. The highest factor, the price/earnings ratio, is at the upper quartile. Price/equity ratio is slightly below median. Ratio of enterprise value/earnings before interest and taxes is below median. Ratio of enterprise value/revenue is lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.
Arrow Financial has a major value gap compared to the median. For AROW to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.33X to 3.95X. If AROW’s ratio of enterprise value/revenue were to rise to 3.95X, its stock price would be higher by $19 to $42.
For AROW to achieve upper quartile valuation relative to the Arrow Financial Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.33X to 4.61X. If AROW’s ratio of enterprise value/revenue were to rise to 4.61X, its stock price would increase by $26 from the current level of $24.
VALUE TARGETS
AROW is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
Arrow Financial’s current Price Target of $44 represents a +87% change from the current price of $23.54.
This moderately high appreciation potential results in an appreciation score of 66 (only 34% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 66, the high Power Rating of 88 contributes to an Value Trend Rating of A.
Arrow Financial’s current Price Target is $44 (+22% from the 2023 Target of $36 and +87% from the 04/08/24 price of $23.54). This rise in the Target is the result of a +3% increase in the equity base and a +19% increase in the price/equity multiple. The forecasted increase in cost of equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 11.2% — slightly above our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2015 and 2023. The current forecast is steady at the 2021 peak of 13%.
PTR’s growth forecast is 6.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2017 and 2023. The current forecast is above the 2017 low of 2%.
PTR’s cost of equity forecast is 8.1% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic increase between 2015 and 2023. The current forecast is steady at the 2016 low of 6.7%.
At Arrow Financial’s current price of $23.54, investors are placing a negative value of $-11 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 10.0% per year, and a return on equity of 7.6% versus a cost of equity of 6.5%.
PTR’s 2025 Price Target of $44 is based on these forecasts and reflects an estimated value of existing assets of $35 and a value of future investments of $9.
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