2023-10-13 08:51:19 ET
Summary
- Enterprise Bancorp has grown its earnings per share 39% since my first article, but its stock has underperformed the S&P 500 due to negative market sentiment towards regional banks.
- The bank has proven resilience during economic downturns and has a conservative management.
- Enterprise Bancorp is trading at a 10-year low valuation level and offers a 10-year-high dividend yield, making it an attractive investment opportunity.
Almost three years ago, I recommended purchasing Enterprise Bancorp (EBTC) for its promising growth prospects and its cheap valuation. Since that article, the bank has grown its earnings per share 39% , from $2.64 in 2020 to $3.67 in the last 12 months. However, the stock has underperformed the S&P 500 by a wide margin, as it has offered a total return of 8% whereas the index has gained 19%. The situation is worse this year, as the stock has declined 22% whereas the S&P 500 has rallied 14%. It is thus natural that some investors may consider selling the stock.
However, the poor stock price performance has resulted primarily from the extremely negative market sentiment over regional banks due to the collapse of Silicon Valley Bank, Credit Suisse and First Republic. In fact, Enterprise Bancorp has outperformed the SPDR S&P Regional Banking ETF (KRE), which has plunged 29% this year. Given the proven resilience of Enterprise Bancorp to downturns and its depressed valuation level, the stock is likely to highly reward those who purchase it around its current price and maintain a long-term perspective.
business Overview
Enterprise Bancorp is the holding company of Enterprise Bank and Trust Company, which provides commercial banking products and services. The bank has 27 branches in the North Central area of Massachusetts and Southern New Hampshire.
Just like the vast majority of the stocks of regional banks, the stock of Enterprise Bancorp has declined this year due to the financial turmoil caused by the collapse of Silicon Valley Bank, Credit Suisse and First Republic. These banks were severely hurt by losses in their bonds, which were caused by the aggressive interest rate hikes implemented by the Fed. Due to these losses, the depositors of these banks lost their confidence and withdrew their deposits, thus causing a liquidity crunch.
However, it is critical to realize that Enterprise Bancorp is completely different from the banks that collapsed. In contrast to these banks, which had some large corporate depositors, Enterprise Bancorp has numerous retail depositors and hence it is not vulnerable to potential withdrawals from a few customers.
Even better, Enterprise Bancorp has a conservative management, which has always pursued a defensive business model. The bank has always maintained a conservative loan portfolio, and thus it has endured every single recession without a problem. In the Great Recession, the worst financial crisis of the last 90 years, most banks incurred excessive losses and cut their dividends, but Enterprise Bancorp grew its earnings per share 37% and continued raising its dividend.
The bank proved resilient throughout the coronavirus crisis as well. It posted just a 9% decrease in its earnings per share in 2020 and recovered swiftly, with record earnings per share in 2021 and 2022. To cut a long story short, Enterprise Bancorp is one of the most resilient banks during economic downturns.
Its resilience is evident in the ongoing financial turmoil as well. In the second quarter, the company grew its loans and its deposits by 9% and 1%, respectively, over last year’s quarter. The increase in deposits confirms that the customers of the bank have not lost their faith, and thus they have not withdrawn their deposits. Other regional banks reported a significant decrease in their deposits in the second quarter. M&T Bank ( MTB ) and Cullen/Frost Bankers ( CFR ) saw their deposits decrease by 5% and 8% , respectively, over the prior year’s quarter. Given the healthy trend in its deposits, Enterprise Bancorp is not likely to face liquidity issues, particularly given the high quality of its loan portfolio. Non-performing loans amounted to 0.23% of total loans in the latest quarter.
Moreover, the earnings report of Enterprise Bancorp was positive in all aspects. The company grew its lending rates faster than its deposit rates, and thus it enhanced its net interest margin from 3.45% to 3.55%. As a result, it grew its net interest income 6% and its earnings per share 18%, from $0.67 to $0.79. In the first half of the year, the bank has grown its earnings per share 10%, from $1.52 $1.67. Overall, Enterprise Bancorp is proving its resilience to downturns once again.
Investors should also be aware of the impressive consistency of this high-quality bank. Enterprise Bancorp has remained profitable for 135 consecutive quarters, i.e., every single quarter since its foundation. This exceptional record is a testament to the quality of the management of the bank and its defensive business model. It is also worth noting that the company has grown its earnings per share by 11% per year on average over the last nine years. This growth rate combined with the consistency of the bank render the stock highly attractive for investors who can wait patiently for the negative market sentiment to abate.
Valuation – Expected Return
Enterprise Bancorp is trading at a trailing price-to-earnings ratio of only 7.6 . This price-to-earnings ratio is far lower than the 10-year average price-to-earnings ratio of 13.9 of the stock. It is also remarkable that the stock is currently trading at a 10-year low valuation level. The depressed valuation has resulted from the extremely negative market sentiment over regional banks. As usual during downturns, the negative market sentiment has affected both the weak and the solid companies of the sub-sector of regional banks.
As mentioned above, Enterprise Bancorp can easily endure the ongoing financial turmoil. To be sure, the bank has posted record earnings per share of $3.67 over the last 12 months. As soon as the negative market sentiment abates and investors shift their focus on the solid fundamentals of Enterprise Bancorp, the stock is likely to enjoy a wide expansion of its valuation level, towards historical levels. If the stock reverts to a still conservative price-to-earnings ratio of 11.0 and does not grow its earnings, it will rally to about $40 (=3.67*11). Therefore, the stock has 43% upside potential.
Dividend
Enterprise Bancorp is a Dividend Champion, with 29 consecutive years of dividend growth. None of the well-known large-cap banks have accomplished such a long dividend growth streak, as they struggled during the Great Recession. The dividend growth record of Enterprise Bancorp is a testament to its rock-solid business model.
Enterprise Bancorp is currently offering a 10-year-high dividend yield of 3.3%.
This yield may be uninspiring for income-oriented investors, but it is more than twice as much as the 1.5% yield of the S&P 500. Moreover, Enterprise Bancorp has a rock-solid payout ratio of only 25% and hence it can easily continue raising its dividend meaningfully for the next several years. The company has grown its dividend by 9.4% per year on average over the last five years and by 9.3% per year on average over the last three years. Given the low payout ratio and the reliable performance record of the bank, investors can rest assured that the dividend will keep rising for years.
Risk
The financial turmoil that affected some regional banks early this year has abated, but it might return to the headlines in the near future. In such a case, the stock of Enterprise Bancorp would probably come under pressure, along with the entire sub-sector of regional banks. However, the bank has proved resilient during all kinds of downturns. Therefore, the stock would probably retrieve its losses as soon as the downturn subsided. It is also unlikely to experience another turmoil related to regional banks anytime soon.
Another potential risk is the adverse scenario of a severe recession. Enterprise Bancorp has repeatedly proved resilient to recessions, but its earnings might decline in such a scenario. In addition, its stock price would probably come under pressure due to negative market sentiment. Nevertheless, as experience has shown, the bank would probably recover strongly during the subsequent recovery of the economy. It is also impossible to predict the time of a recession, and hence investors should not remain on the sidelines for this reason.
Final thoughts
Enterprise Bancorp is trading at an extremely cheap valuation level, which is a 10-year low for the stock, and is offering a 10-year-high dividend yield. Investors can purchase this exemplary bank at such a cheap level due to the negative market sentiment that surrounds the entire category of regional banks. As soon as the market shifts its focus on the fundamentals of Enterprise Bancorp, the stock is likely to highly reward patient investors.
For further details see:
Enterprise Bancorp Has Become Extremely Cheap