WTFC - Wintrust Financial: Upside Value Considering Positive Fundamental Trends

2023-09-06 21:44:36 ET

Summary

• Wintrust has released strong financial results this year, despite the sustained drop in the stock price following the US regional banking crisis.
• The management team and Top 10 shareholders have reported notable purchase transactions and increased their shareholdings in recent quarters.
• Analysts are bullish on WTFC, with a consensus target price implying a potential return of 21%.

Investment Thesis

Wintrust Financial ( WTFC ) suffered a significant drop in its stock price following the US regional banking crisis earlier this year. Despite the sector-wide fall, WTFC has continued to release strong financial results, with positive year-on-year increases in Revenues, Net Income, and EPS as of Q2 23. The stock looks undervalued relative to its peer group, and I believe there is a notable divergence between the financial performance and the stock performance, which provides us with an attractive long opportunity in WTFC.

Company Summary

Wintrust Financial Corporation is a multi-bank holding company consisting of 15 subsidiary banks, primarily located throughout Illinois, Wisconsin, and Indiana. Total assets recently grew to $54.3 billion , and through the group of banks, Wintrust operates three business segments.

• Community Banking - providing community-orientated, retail and commercial banking services, such as online and mobile transactional banking, consumer loans, and real estate loans.
• Specialty Finance - providing financing of insurance premiums for retail individuals and commercial businesses, accounts receivable financing, and other specialized lending services.
• Wealth Management - providing traditional trust and investment services, securities brokerage, and retirement planning.

Looking at the segment breakdown in terms of Revenues, we see an attractive mix of the abovementioned product lines sustained over the recent annual reporting periods. Whilst we may like to ideally see less reliance on community banking over time in terms of top line generation, the two other segments demonstrate the management team's successful execution of pursuing a diversified commercial strategy, which not all regional banks can emulate to the same extent. Over time this segment diversification may help to reduce the volatility of earnings and help stimulate further financial growth as both existing and prospective retail and commercial clients have a wider array of products and services that they can use at Wintrust.

In terms of share performance, we can see the significant sell-off and drawdown period from March to May, following the fall out of the US regional banking crisis, in which firms such as Silicon Valley Bank ((SVB)) and Signature Bank ( OTCPK:SBNY ) collapsed. Whilst WTFC stock has regained some of that lost ground, it is still trading at a significant discount to the relevant benchmark of the S&P 500 Financials Index. WTFC stock is currently down ~7.5% year-to-date, despite the strong financials discussed below. I believe this divergence between financial performance and stock performance cannot be sustained over the long-term and it warrants an upward correction in WTFC's stock price.

Positive Financial Performance

WTFC reported earnings in July for period Q2 23, and the results continued the positive trend seen in recent quarters. The latest quarter represented the second most profitable period in the company's history. Based on Bloomberg figures below, Net Revenues hit $560.6 million, up ~27% on a year-on-year basis, Net Income was $147.8 million , representing a phenomenal increase of ~69% from the same period last year, and Earnings Per Share were $2.38 , up from $1.49 in Q2 22. A final key piece of data to highlight is the significant rise in Net Interest Income over the quarters, as WTFC has been able to successfully navigate and benefit from the higher interest rate environment. Despite the lower market capitalization as of late, WTFC is boasting significantly better financials than last year.

As the group's business is notably driven by community banking, it is worth spending a moment on the loan portfolio. Based on the recent quarterly earnings presentation, we see positive and encouraging trends. Firstly, there is a notable upward trend in loan growth, as well as a higher average total loan yield within the portfolio, increasing from 5.82% in Q1 23 to 6.23% in Q2 23. At the same time, it looks like this growth is managed in a sustainable manner, as the group is pursuing a well-diversified loan mix and is not overly concentrated to residential and commercial real estate, which are areas that are increasingly in the spotlight as the cost of debt rises thanks to the Federal Reserve's monetary policy.

Looking forward, the market consensus is indicating a further increase in Net Revenues and Net Income, and forecasting a relatively stable EPS. Based on both the realized quarterly results and the predicted performance for the rest of the year, the fundamentals are currently not being reflected in the stock's performance, and we could possibly expect the stock to play catch up and rise in price. This divergence is well illustrated by the below fundamental graph, which shows that despite the significant increase in Revenues, the share price is still trading at levels that are in line with 2021.

Bullish Analyst Forecasts

Looking at the view of the Sell-Side community through the Bloomberg Analyst Recommendations page, we can see a notable bullish outlook across the board. ~92% of the surveyed equity research analysts have issued a "BUY" recommendation on WTFC, and none of the analysts have rated the stock as "SELL".

In addition, the consensus 12 month target price is $94.75, which when considering the current stock price, implies a possible return potential of ~21%. This strong consensus in the market helps affirm my long thesis on WTFC.

Undervalued Relative To Peers

Referring to Bloomberg's Relative Valuation screen, WTFC looks to be significantly undervalued to its North American Regional Banks peer group, trading at a discount in terms of Price-to-Earnings Ratio for the next fiscal year.

The stock's Bloomberg Adjusted EPS estimate for FY 2023 is $9.90, which if we apply to the peer group median P/E Ratio of 8.54x, we can calculate a target price of ~$98 for WTFC. This represents a significant potential uplift and is also relatively in-line with the analyst consensus implied return potential of ~21% illustrated earlier, which helps give confidence in my undervalued thesis.

Positive Shareholder Trends

We've had a look at the Sell-Side sentiment, but let's see if the Management and Buy-Side view helps affirm the bullish outlook by analysts.

Based on the Bloomberg Management Insiders page, we can see that the majority of transactions executed and reported by the executive team are overwhelmingly buy transactions. This implies that the stock prospects are well-supported by insiders and this trend can possibly indicate that the management team believe that WTFC's recent prices represent good value for a long-term trade, and that they have plenty of skin in the game to ensure that the firm continues to execute on its commercial objectives in order to lift the stock price going forward.

In terms of the top institutional shareholders, we see further supportive data to the thesis. Over the recent quarters, we can see big names such as Vanguard (~10.1% of shares outstanding), BlackRock (BLK) (9.8%), and JPMorgan (JPM) (3.2%) increasing their stakes in WTFC to a notable extent. I interpret this as a bullish signal and that they possibly also see the recent stock levels as an attractive investment for the long term, or else they would arguably be maintaining or selling parts of their stake rather than increasing their position over the period.

Options Positioning

So far, we have discussed the fundamental data to provide insights into the long-term prospects to support the thesis, but I also like to keep an eye on the options market that can shed light on more opportunistic positioning that could indicate shorter-term views in the market.

The Put/Call Ratio in the options market compares the current open interest for put options versus call options. A value below 1 represents a greater amount of open interest in call options versus puts. The current value of ~0.16 indicates an overwhelmingly strong positioning in favor of call options, which would pay off if prices move higher. This technical perspective helps affirm that there is a large portion of traders that may believe the stock is currently too cheap and are speculating on long trades on WTFC through options contracts.

Risks

The key risk to the thesis is that the macroeconomic environment in the US sours, leading to a renewed risk-off approach to financial stocks, and regional banking stocks in particular. We saw how quick the panic selling played out in March, as one bank failure quickly led to questions on which bank may be at risk next. In this scenario, micro considerations on the strength of any given bank are often discarded, as investors look to sell the rumor and then gather the facts. So far, US economic data has remained relatively resilient despite the Fed's monetary tightening, but there is the possibility that we still may not be at the peak level of rates as inflation continues to be elevated. A prolonged period of time at high interest rates may lead to stress in the loan portfolio, leading to losses and larger provisions that will negatively impact the profitability of WTFC, and ultimately weigh down on the stock price.

In Conclusion

Wintrust has built an attractive portfolio of subsidiary banks that offer a broad range of products and services to their retail and commercial clientele. The commercial strategy seems to be paying off, as financial results have improved significantly in comparison to last year. Nevertheless, the stock price has fallen victim to the US regional banking crisis and has failed to recover to the pre-crisis levels. However, there are multiple positive data points, such as the positive analyst sentiment and relative undervaluation to peers, that make a compelling argument for a long-term value trade.

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