FUNC - First United: Yielding Near 5% Shares Undervalued Ahead Of Q2 Earnings

2023-07-20 13:51:38 ET

Summary

• The iShares U.S. Regional Banks ETF plunged more than 40% in March 2023 but has since rebounded to fresh 4-month highs, outpacing the S&P 500 since late June.
• First United Corporation, a small regional bank, is set to report Q2 results next week; despite a struggling outlook, the bank has increased its dividend and shows some positive technical trends.
• While the broader banking sector has faced issues, FUNC's fundamental trends seem to be holding up, with a net interest margin of 3.5.
• I spot key price levels to watch ahead of and through FUNC's unconfirmed earnings date next week.

U.S. regional banks have endured a dramatic 2023. The focal point of wild price action is undoubtedly the March banking turmoil. The iShares U.S. Regional Banks ETF (IAT) plunged more than 40%, taking the focused ETF from a 2023 gain (on an absolute and a relative basis to the S&P 500) to a big-time underperformer by early May. A bullish turn has taken place in IAT, though. Regional banks collectively have broken out to fresh 4-month highs, outpacing the SPX in the last month.

One small bank is slated to report Q2 results next week. I reiterate my buy rating on First United Corporation (FUNC) based on valuation and some modestly better technical trends, though the bears appear in control of the chart.

Regional Bank Perking Up

According to Seeking Alpha, FUNC operates as the bank holding company for First United Bank & Trust that provides various retail and commercial banking services to businesses and individuals. It offers various deposit products, which includes checking, savings, and money market deposit accounts, as well as certificates of deposit.

The Maryland-based $110 million market cap Regional Banks industry company within the Financials sector trades at an exceptionally low 4.6 trailing 12-month GAAP price-to-earnings ratio and pays a high 4.9% dividend yield. Ahead of earnings on the 25th, there isn't reliable options pricing data to gather an implied move, though short interest is low at just 0.1% as of July 19, 2023.

Back in March, the firm issued a bullish corporate body language move by hiking its dividend by 11% to $0.20. Then, despite industry shakiness, FUNC's management team declared a payout of the same amount. That brings the yield to near 5%, a historically high percentage. In April, First United issued Q1 results. GAAP EPS verified at $0.65 on net sales of $18.9 million (a 6.4% increase from the same period a year earlier).

What I found particularly encouraging was that FUNC's net interest margin was 3.5% over the troubled Q1 2023 period - that was a 0.1 percentage point increase from Q1 of 2022, though a small sequential reduction from 3.6% in Q4 last year. Overall, fundamental trends seem to be going ok amid broader banking issues.

On valuation , the consensus estimate shows a modest 2023 decline in net sales while EPS is expected to drop $3.54 to $2.75 from 2022 to 2023. Out-year per-share profits are forecast to dip further to $2.35. So, the growth outlook is not impressive for this struggling regional bank. But is there enough bad news already priced in following the Q1 mini-financial crisis that has been apparently capped? Perhaps so. The company increased its dividend earlier this year (something I hinted at in my previous write-up in late 2022).

FUNC: Not So Fun Earnings Trajectory

If we assume $2.35 of normalized annual EPS and apply a sector median P/E multiple of 10, then the stock should be near $23.50. Of course, many regional banks feature a steeply discounted earnings multiple. So, if we further apply a 20% margin of safety discount, then the stock should be near $20, rendering shares undervalued in my opinion.

FUNC: Very Low Valuation Metrics, Too Pessimistic To Me

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Tuesday, July 25, AMC. Its recently raised dividend is then distributed on the first of August. No other catalysts are seen on the corporate event calendar.

Corporate Event Risk Calendar

The Technical Take

My buy rating issued last December worked for a time. FUNC rallied after holding $18 support that I had pointed out as pivotal. After notching a double-top above $20, shares were hit hard by the U.S. regional banking crisis. The stock plunged to just above $12. Lately, however, there are signs of life in terms of positive price action.

A higher low was established earlier this month following the May bottom, and the stock is right back to key resistance that has emerged in the $16 to $16.50 range. With a declining long-term 200-day moving average, the bears are in control, but should FUNC fancy a move above both $16.50 and $17.30, then the bulls could have something to work with. Still, I notice heavy volume by price in the $17 to $19 zone, so investors who bought in that range may look to sell in order to get back to even.

Overall, there are some inklings of hope, but the technical picture is merely neutral in my view.

FUNC: $16.50 Key Resistance

The Bottom Line

I reiterate my buy rating on FUNC. I see the stock has undervalued today, but it will be key to watch how earnings unfold next week. Moreover, the chart has some positive aspects, but a downtrend persists.

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