CAC - Camden National: Attractively Valued But Margin Is A Cause For Concern
2023-09-03 04:56:56 ET
Summary
- After a disappointing first half of the year, I’ve decided to reduce the margin estimate for 2023.
- I’m now expecting earnings to dip by 19% YoY in 2023. Previously I was expecting a dip of 1%.
- Camden National is offering a high dividend yield of 5.1%. The dividend appears safe from cuts.
- The year-end target price suggests a double-digit upside from the current market price.
Earnings of Camden National Corporation ( CAC ) will most probably decline this year because of margin shrinkage. On the other hand, subdued loan growth will offer some support to the bottom line. Overall, I’m expecting Camden National to report earnings of $3.39 per share for 2023, down 19% year-over-year. Compared to my last report on the company, I’ve reduced my earnings estimate as I’ve decreased my margin estimate. Camden National is offering a high dividend yield of over 5%, as well as an attractive price upside. Therefore, I’m maintaining a buy rating on Camden National Corporation.
Expecting Loan Growth to Stabilize at a Slightly Lower Level
Loan growth continued to slow down for the second quarter of 2023. Camden National reported loan growth of 4.5% (annualized) for the first half of the year, which was mostly in line with my expectations. The management is planning to intentionally slow down loan growth and focus on the margin instead, as mentioned in the August presentation . Therefore, it’s likely that the balance of loans added in the second half will be lower than the balance added in the first half.
I’m expecting the residential loan segment to be the biggest contributor to a slowdown as it is highly sensitive to borrowing costs (i.e. interest rates). Residential loans are an important focus area for Camden National as residential real estate loans and home equity lines of credit make up around 49% of total loans. Due to the segment’s large size, the slowdown in the residential loan segment will have a significant effect on the total loan portfolio.
The outlook for commercial loan growth is much better. Camden National mainly operates in Maine with some presence in New Hampshire and Massachusetts. As shown below, the unemployment rates of all three states are quite low compared to the national average.
Considering these factors, I’m expecting the loan portfolio to grow by 4.0% annualized in the second half of this year. To be a bit conservative, I’m assuming that loan growth will continue at around the same rate next year, even though the anticipated rate cuts should lead to a higher loan growth rate. Further, I’m expecting deposits to grow in line with loans. The following table shows my balance sheet estimates.
| Financial Position |
| FY19 |
| FY20 |
| FY21 |
| FY22 |
| FY23E |
| FY24E |
| Net interest income |
| 128 |
| 136 |
| 137 |
| 148 |
| 132 |
| 136 |
| Provision for loan losses |
| 3 |
| 12 |
| (3) |
| 5 |
| 4 |
| 4 |
| Non-interest income |
| 42 |
| 50 |
| 50 |
| 41 |
| 40 |
| 41 |
| Non-interest expense |
| 95 |
| 100 |
| 104 |
| 107 |
| 106 |
| 107 |
| Net income - Common Sh. |
| 57 |
| 59 |
| 69 |
| 61 |
| 50 |
| 53 |
| EPS - Diluted ($) |
| 3.69 |
| 3.95 |
| 4.60 |
| 4.17 |
| 3.39 |
| 3.60 |
| Source: SEC Filings, Earnings Releases, Author's Estimates(In USD million unless otherwise specified) |
In my last report, I estimated earnings to decrease by 1.4% year-over-year to $4.11 per share. I’ve now reduced my earnings estimate mostly because I’ve slashed my margin estimate.
Risks are not a Concern
Camden National’s risk level appears low due to the following factors.
- Uninsured and uncollateralized deposits were just 15% of total deposits at the end of the last quarter, as mentioned in the presentation. Available primary liquidity was 2.0x the uninsured and uncollateralized deposits.
- Unrealized losses on the Available-for-Sale securities portfolio amounted to $99.8 million, which is 21% of the total equity book value. This isn’t too bad considering Camden National’s equity market value has dipped by 20.51% year-to-date.
- The loan portfolio’s credit quality is quite good. Non-performing loans made up just 0.13% of total loans at the end of June, as mentioned in the 10-Q filing .
High Total Expected Return Justifies a Buy Rating
Camden National is offering a dividend yield of 5.1% at the current quarterly dividend rate of $0.42 per share. The earnings and dividend estimates suggest a payout ratio of 49.5% for 2023, which is higher than the five-year average of 32%. Although the anticipated payout ratio is higher than the historical average, I’m not expecting a cut in the dividend level because 49.5% is easily sustainable.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Camden National. The stock has traded at an average P/TB ratio of 1.61 in the past, as shown below.
| FY19 |
| FY20 |
| FY21 |
| FY22 |
| Average |
| TBVPS - Dec 2023 ($) |
| 26.3 |
| 26.3 |
| 26.3 |
| 26.3 |
| 26.3 |
| Target Price ($) |
| 37.0 |
| 39.6 |
| 42.2 |
| 44.9 |
| 47.5 |
| Market Price ($) |
| 33.3 |
| 33.3 |
| 33.3 |
| 33.3 |
| 33.3 |
| Upside/(Downside) |
| 11.2% |
| 19.1% |
| 27.0% |
| 34.9% |
| 42.8% |
| Source: Author's Estimates |
The stock has traded at an average P/E ratio of around 10.4x in the past, as shown below.
| FY19 |
| FY20 |
| FY21 |
| FY22 |
| Average |
| EPS 2023 ($) |
| 3.39 |
| 3.39 |
| 3.39 |
| 3.39 |
| 3.39 |
| Target Price ($) |
| 28.4 |
| 31.8 |
| 35.2 |
| 38.6 |
| 42.0 |
| Market Price ($) |
| 33.3 |
| 33.3 |
| 33.3 |
| 33.3 |
| 33.3 |
| Upside/(Downside) |
| (14.6)% |
| (4.4)% |
| 5.8% |
| 16.0% |
| 26.2% |
| Source: Author's Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $38.7 , which implies a 16.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 21.5%. Hence, I’m maintaining a buy rating on Camden National Corporation.
For further details see:
Camden National: Attractively Valued But Margin Is A Cause For Concern