2023-12-30 00:49:19 ET
Summary
- Bank OZK is a regional bank that has shown outstanding long-term performance and may be considered a best-of-breed.
- The bank's unique business model, which includes a high loan-to-deposit ratio and a focus upon commercial real estate loans, offers investment opportunities. I believe the CEO is a banking genius.
- Despite recent gains, Bank OZK stock appears reasonably priced, and my fair value estimate is about $70, with a current trading price of $51 and a 2.9% dividend yield.
Background
Historically, four stock sectors tend to outperform during transition periods of economic stress to the beginnings of a new economic recovery.
These are Tech, Consumer Discretionary, Industrials, and Financials.
Bank stocks reside squarely in the Financial sector camp.
Heading into 2024, I am constructive on several large mega-banks, especially Bank of America ( BAC ).
However, in this article, I encourage investors to perform additional due diligence on my favorite regional banking stock: Bank OZK ( OZK )
Why Bank OZK?
I last wrote you about Bank OZK about three years ago in an article entitled, " Bank OZK: Still Some Gas in the Tank After A 50% Uplift." Since then, OZK registered ~50% total return; double the S&P500 index.
My continued investment thesis for Bank OZK may be summarized in three bullet points.
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Bank OZK exhibits outstanding, long-term performance in nearly every banking metric. Among regional banks, it is best-of-breed.
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The institution's business model isn't particularly well understood and / or tends to be evaluated incorrectly. Such a disconnect offers opportunity.
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The stock remains inexpensive on several valuation metrics.
Bank OZK: Best-of-Breed
A unique business model and remarkable CEO are the drivers behind Bank OZK's outstanding long-term operating performance.
Why is the business model unique?
Most banking institutions are run “conservatively,” meaning management tends to follow a set of industry-standard best practices that most insiders consider “safe.” These include maintaining a relatively low loan-to-deposit ratio and seeking a well-diversified loan portfolio.
Bank OZK does neither.
While many banks consider a 50% to 60% loan-to-deposit ratio acceptable, Bank OZK management targets a ~95% L2D.
In the most recent quarter, ending 9/30/23, the L2D ratio was 98 percent.
Meanwhile, the loan book is spread thick with CRE loans. The bank's growth flywheel is the RESG (Real Estate Specialties Group). RESG concentrates its CRE lending into high profile, high-grade projects, sponsored by premier developers.
As of 9/30/23, the RESG comprised 71% of the total funded and unfunded balances of non-purchased loans.
It's a Warren Buffett-esque case whereby instead of not keeping all your eggs in one basket, it's “Keep all your eggs in one basket, but watch that basket closely.”
Who is the CEO?
George Gleason is the CEO. IMHO, Mr. George Gleason is a banking genius. He took over the bank when he was 25 years old. For over four decades, he's been the President / CEO of the organization. Mr. Gleason is shrewd, confident, experienced, and ambitious. His leadership style permeates the bank. I am a firm believer that management makes a difference. Bank OZK is a case-in-point.
Indeed, Mr. Gleason has engineered a business model unlike most other banks. The results speak for themselves.
Key Operating Metrics vs Peers
A picture tells a thousand words. I'll let some 3Q2023 presentation materials offer insight into long-term Bank OZK results.
Asset Quality
Despite the RESG concentrating upon CRE loans, the NCO ratio has outperformed peers in every year since 1997.
Bank OZK investor relations website
Net Interest Margin
Bank OZK records NIMs far above industry averages consistently.
Bank OZK investor relations website
Non-Performing Loans
NPLs, NPAs, and loans past due all run below peer averages.
Bank OZK investor relations website
Efficiency Ratio
Bank OZK registers a remarkably low ER. This reflects the unique business model.
Bank OZK investor relations website
Building Shareholder Capital
At core, bank management is tasked with creating shareholder value. Bank OZK has an outstanding, long-term track record. Management builds shareholder equity year-in and year-out. The bank has increased the cash dividend for 53 straight quarters. Through nine months, the 2023 dividend payout ratio is 23 percent.
Bank OZK investor relations website
Bank OZK Common Stock Valuation
Despite OZK stock's move up since I last wrote you, shares remain in value territory.
Let's look at a ten-year price-and-earnings chart via FAST Graphs:
The long-term trimmed P/E is 13.2x (the blue line). The current ttm P/E is 8.9x. It appears there's plenty of room for multiple expansion.
But let's look a little deeper.
Recent years have seen the earnings multiple compress. Here is another price-and-earnings FAST Graph, but this one is a seven-year chart:
Here we find the average multiple is just 9.5x. There is some rationale behind Mr. Market's action; in recent years, Bank OZK earnings have trended up, but the move has been lumpy. Compounding matters, current forward Street estimates have been soft.
However, the last several years have seen developments create uncertainty. These include the C19 crisis, an inflation surge, rapidly rising interest rates, and fears about a CRE meltdown. Looking back at the first FAST graph, one can see the 2015 to 2019 earnings trajectory was far more consistent. Looking forward, I believe earnings will behave more comparably to the pre-C19 period.
Let's look at another data point:
fastgraphs.com
Bank OZK management has had a penchant for beating Street estimates. Today's Street estimates indicate modest forward EPS growth.
My view?
I believe as interest rates ease, Bank OZK spreads and loan growth will increase. Profits will accelerate. I think there is a likelihood current Street estimates for 2024 and 2025 will be revised upward.
Furthermore, I contend this may translate into OZK stock enjoying a 12x P/E multiple; on $6.00 EPS, we'd have a $72 stock.
Turning to price-to-book, here's a long-term chart highlighting Bank OZK year-end results:
As of today, the P/B ratio is 1.25x.
I see price-to-book at low ebb. Historically, it has been and is likely to revert towards the mean. A 1.8x P/B yields a $71 stock. Such a multiple is well within historical norms.
Here's one more angle on valuation.
Benjamin Graham, the godfather of value investing, derived a simple formula that offers a rule-of-thumb Fair Value for a stock. The Graham Number is generated by using the following formula:
Investopedia.com
Note the formula utilizes both earnings and book value.
Filling in the variables (the formula calls for the average of the past three years' EPS), the resultant for Bank OZK is $67 a share.
Reviewing the three valuation benchmarks, my Bank OZK Fair Value Estimate is ~$70. When I wrote this article, shares closed at $50.66.
Meanwhile, OZK stock offers a 2.92% dividend yield; and the dividend has been raised each QUARTER for the past 53 consecutive quarters.
Investors may also note that 9.8% of Bank OZK stock is currently shorted; or 11.2 days to cover. At some point, shorts have to cover.
Conclusion
Historically, bank stocks tend to create the greatest investment alpha during the early phase of a fresh economic expansion. I believe the Fed is leading us to such a juncture.
Bank OZK represents a banking institution with a unique business model. The model has helped the company generate outstanding long-term results that beat industry peers consistently. CEO George Gleason is a banking genius. I contend Bank OZK is a regional banking best-of-breed.
Despite strong recent gains, OZK stock remains reasonably priced when based upon several valuation metrics. My FVE target is ~$70. The stock trades at ~$51 today and offers a 2.9% dividend yield.
Long and strong OZK.
Please do your own careful due diligence before making any investment decision. This article is not a recommendation to buy or sell any stock. Good luck with all your 2024 investments.
For further details see:
Bank OZK: A Best-Of-Breed For 2024