VBTX - Veritex: Record Profits Depressed Multiples Momentum And A Potentially Accretive Acquisition

2023-07-28 23:30:11 ET

Summary

• Veritex’s P/E and P/S multiples (Quarterly) have been falling since 2018 and are at record lows since 2014. Meanwhile, revenue and net income are at record highs.
• In 2022, the firm acquired interLINK, a proprietary software platform that’s designed to function as a bank treasury. Management expects it to be 8% accretive in 2024.
• Despite risks including geographic concentration and a rise in share count and leverage ratios, the firm’s strong financials, cheap valuations, and recent momentum present an interesting opportunity for investors.

Veritex Holdings, Inc. ( VBTX ) is the holding company of Veritex Community Bank, which serves individuals and corporations in parts of Texas. As its 2022FY 10-K explains:

The Bank provides… commercial and retail lending and checking and savings deposit products… Our current primary market includes the broader Dallas-Fort Worth metroplex and the Houston metropolitan area.

Our business is conducted through one reportable segment, community banking, which generates the majority of our revenues from interest income on loans, customer service and loan fees, gains on sale of government guaranteed loans and mortgage loans and interest income from securities.

The company has completed seven whole-bank acquisitions since it started operations in 2010, with the most recent one being in early 2019.

Elevator Pitch

• Veritex’s P/E and P/S multiples (Quarterly) have been falling since 2018 and are at record lows since 2014. Meanwhile, revenue and net income (LTM) are at record highs.

• Veritex acquired interLINK, a proprietary software platform that’s designed to function as a bank treasury, in 2022. Management expects an IRR of over 25% and that it will be “8% accretive in 2024, and +14% accretive on a run-rate basis thereafter.”

• Despite risks including geographic concentration and a rise in share count and leverage ratios, the firm’s strong financials, cheap valuations, and recent momentum present an interesting opportunity for investors.

Strong Financials

Revenue, EBIT, and net income ((LTM)) are all in uptrends and have now reached record highs since 2014, according to data from StockRow .

Veritex’s ROE (LTM) of 10.64% is close to a record high, now at its 4th highest level since 2014. Its ROA (LTM) of 1.31% is near the upper end of its historical range. The firm’s net margin (LTM) is historically healthy, and it has stayed above 20% since Q3-2019.

The firm’s debt/equity and debt/asset ratios are somewhat historically elevated, but not unreasonable, sitting at 1.04 and 12.46%, respectively.

Unfortunately, Veritex’s number of common shares has nearly doubled since Q4-2017, indicating a risk of equity dilution. However, per share metrics such as revenue-per-share (LTM) remain healthy. Also, the share count has been fairly stable since Q1-2019.

Historically Cheap Multiples

Veritex’s P/E and P/S multiples (Quarterly) have been falling since 2018 and are at record lows since 2014. Its P/B multiple is also close to a record low, now sitting at 0.65.

Industry Specific Metrics

In the most recent quarter (Q2-2023), Veritex saw a 44 bps improvement in its CET1 ratio (now at 9.71%) compared to last quarter, per the firm's Q2-2023 earnings release . The firm also reduced its exposure to commercial real estate. Total deposits rose 2.2% compared to last quarter and now amount to $9.23b. The company’s ratio of non-performing assets to total assets rose 20bps, but it is still fairly low at 0.55%.

Potential Catalysts

In March 2022, Veritex acquired interLINK, a proprietary software platform that’s designed to function as a bank treasury. Management believes this acquisition will have an internal rate of return ((IRR)) of over 25%, and expects it to be “8% accretive in 2024, and +14% accretive on a run-rate basis thereafter.” In their view:

interLINK will provide flexible and scalable access to approximately $5.7 billion of highly diversified, stable core deposits. This core deposit base creates capacity to reliably fund significant multi-year loan growth and optimize overall funding mix over time.

Risks

Given its focus on metropolitan areas in Texas, Veritex is geographically concentrated and is especially exposed to fluctuations in local economic conditions. Like all companies involved in regional banking, the firm may suffer if the broad macroeconomic climate worsens, or if its credit access becomes more difficult due to adverse movements in interest rates. In its FY2022 10-K , the firm mentions that its exposure to commercial real estate and land loan portfolios means it has extra exposure to credit risk. Also, its corporate customers include small and mid-sized businesses, which tend to have worse chances at weathering economic downturns.

Veritex's operations date back to 2010, so the firm lacks a track record at navigating prolonged recessionary environments.

The company noted that the COVID-19 pandemic continues to affect its operations. Pandemics are hard to predict, and if the COVID-19 pandemic worsens or a new threat emerges, Veritex's results could suffer.

Execution

Buying a stock is a bet on where its price goes, not necessarily the fundamentals of the business. Since there is statistical evidence of trends in equity markets, investors who apply a scientific mindset may benefit from focusing on companies with trending share prices.

VBTX’s share price recently started an uptrend on May 12 and is up 38% since. The stock just recently broke above its multi-month trading range which started back in March, per finviz . Its uptrend is still in the early stages; price has not even cracked above its 200-day average (a popular trend indicator) yet. This nascency could mean the stock has more potential upside, but it also makes it more speculative than one with a more established trend.

Zooming out, the stock is historically depressed, down ~50% from its peak in November 2021 and ~24% from its local peak in June 2018.

It may be sensible to consider a bet on this stock only while the uptrend remains in play, perhaps by requiring that a simple trend signal is active; for example, requiring that price be above its rolling average (50, 75, 100-day, etc; whichever has stronger evidence).

Bottom Line

Veritex’s record profits, depressed multiples, healthy ROA, and potentially accretive acquisition of interLINK present an interesting opportunity for investors. While its price continues to trend, the stock could be a reasonable bet for investors with a momentum-inspired strategy to consider.

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