HTLF - Heartland Financial: Near Fair Value Into Earnings Bearish Technical Momentum

2023-04-21 10:47:16 ET

Summary

• Regional banks have struggled to bounce much following the SVB crisis last month.
• Earnings season is turning less strong, and many big and small names report over the coming week.
• I see shares of HTLF as near fair value, and the options market suggests a big move after Monday's report.

Earnings season has softened. The big banks initially gave an upbeat tone to the street, but the overall EPS beat rate has slipped. Data from Bespoke Invest show that the bottom-line beat rate is now at 67%. Seven percent of firms have raised guidance while 4% have issued lower earnings outlooks. Overall, the average stock has gained 1.2% after issuing results.

Many regional banks have earnings due out over the next few days, and I have a hold rating on Heartland Financial.

Earnings Season Summary Through 4/20

According to CFRA Research, Heartland Financial (HTLF), a multi-bank holding company, provides commercial, small business, and consumer banking services to individuals and businesses in the United States. HTLF is a $20 billion bank (total assets), serving customers across the West, Southwest, and Midwest.

The Denver-based $1.6 billion market cap banks industry company within the Financials sector trades at a low 7.6 trailing 12-month GAAP price-to-earnings ratio and pays a 3.3% dividend yield, according to The Wall Street Journal.

Back in January, Heartland beat on earnings estimates while also topping revenue expectations. Total revenue was higher by 16% year-on-year while Q4 loan growth was a solid 5% with annual loan growth near 15% (which would have been +17% excluding PPP loans). Also encouraging was a 7% dividend hike announced in January, bringing the yield to nearly twice that of the S&P 500.

On valuation , data from CFRA show earnings generally stable at around $5 per share annually from 2021 through 2024. I fear tighter lending standards and a tough credit environment with rising funding costs could pressure profits in the quarters ahead. If we conservatively reduce EPS from $5 down to $4.50 in the next 12 months and apply an industry median 8.8 forward P/E ratio, then we arrive at a fair value estimate near $40, less than 10% above the current share price.

Thus, I see the stock has a very soft buy on valuation, but the technical picture that I will outline below leads me to be more cautious.

HTLF: Earnings Outlook and Key Profitability Ratios

HTLF: Low Valuation Multiples, but Forward Earnings Estimates May Need to Come Down

HTLF: Strong Capital Ratios

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2023 earnings date of Monday, April 24, after market close with a conference call immediately after results cross the wires. You can listen live here . After that, the stock trades ex-div on May 11.

Corporate Event Risk Calendar

The Options Angle

Digging into Monday's earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $1.34 which would be a strong 38% rise from $0.97 of per-share profits earned in the same period last year. The company has topped earnings estimates in the past three quarters, and shares have traded higher after reporting in those instances, so there is a bullish trend.

This time around, the options market has priced in an 8.3% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the report. While premium has been high ahead of several quarterly releases, I see that as expensive given typical actual moves the day after results are issued. So, I would be a seller of that premium.

HTLF: Expensive Earnings, but Positive Beat-Rate Trend

The Technical Take

With expensive options, I see the HTLF trend as being in favor of the bears. But there's some modest support from a trading range in 2020. There was an old breakaway gap in November 2020 when the value trade began to take flight. Shares have approached that level and have bounced modestly - I see this in many regional bank charts, so it's a key spot. Away from that support, there was a bearish trendline break in March around the Silicon Valley Bank crisis and US regional banking turmoil.

And I see high volume by price (which is bearish overhead supply) starting in the low $40s up to the low $50s while long-term resistance is seen at the highs around $54. Thus, even on a rally, the bulls will have a hard time sending shares up with much vigor, in my view. I would sell the $40 call into earnings which is where resistance enters the equation.

HTLF: Shares Fall Back to 2020 Range Following a Trend Break

The Bottom Line

I see shares of HTLF as modestly undervalued, but the chart is bearish. I would like to see better momentum and, more importantly, an upbeat outlook in the company's earnings report on Monday. Tougher banking conditions are likely to pressure earnings growth ahead.

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