Summary
- Regional banks were the darling of investors as rates rose, but recent weakness comes as intermediate-term Treasury yields have dropped.
- One Mid-Atlantic bank features a rising dividend yield and low price-to-book ratio.
- While the chart suggests a pullback, long-term valuations look favorable.
Inflation risks and higher interest rate trending are shifting to recession worries. With a yield curve that's nearly 80 basis points inverted and the risk of lower domestic small business loan demand, regional banks have come under pressure after a big relative rise earlier this year. One small bank sports top-line growth, but are macro headwinds too much to overcome? Let's check in on First United ( FUNC ).
Regional Banks Suddenly Struggling vs SPX
According to CFRA Research, First United Corporation operates as the bank holding company for First United Bank & Trust that provides various retail and commercial banking services to businesses and individuals. The company offers various deposit products.
The Maryland-based $132 million market cap Regional Banks industry company within the Financials sector trades at a low 5.2 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.6% dividend yield, according to The Wall Street Journal . Back in early October, the bank hiked its quarterly dividend by a whopping 20% to $0.18 per share as rising interest rates generally benefit the depository institution. First United also issued quarterly non-GAAP earnings of $1.04 on revenue of $19.75 million, an 8.8% increase from the same period a year ago. The bottom-line number also beat forecasts of just $0.96, according to Fidelity Investments .
On valuation , FUNC trades at an earnings multiple of roughly half that of the industry, despite having decent sales growth in the past 12 months. Moreover, Morningstar placed a quantitative fair value stock price of $27.27 vs. a $19.85 closing price last Thursday on this small-cap value stock. With an earnings yield near 20% and trading at just 1.0 times book, I see the stock has a solid value here.
FUNC: Stock Price vs Fair Value
CFRA Research estimates show that per-share profits are seen as rising from $2.95 in 2021 to $3.65 this year. Next year, though, earnings are expected to retreat modestly. Still, even with a below-market 10x P/E on $3.5 of earnings, you get a much higher stock price than where FUNC trades today. Meanwhile, margins are positive, and its ROE is much better than the industry average, per CFRA. Overall, I like the earnings and valuation story here.
Higher Profits in 2022, Small EPS Drop Expected Next Year
Looking ahead, corporate event data from Wall Street Horizon show a Q4 2022 earnings date of Thursday, Feb. 2 AMC. Before that, the stock trades ex-div on Thursday, Jan. 12.
Corporate Event Calendar
The Technical Take
With a good-looking valuation and respectable yield, how does the chart look? I see shares as in a trading range, so buying the dip or playing for a bullish breakout can make sense. Notice in the chart below that the stock has low volume and is coming off of overbought levels. A further pullback to the $18 to $19 range looks in play to me - that would be a buying spot, with a sell stop under the November low of $17.93. I see resistance in the $22 to $23 zone.
FUNC: Buy On A Retreat to Support
The Bottom Line
Regional banks face a scary time ahead with a steeply inverted yield curve and domestic recession risks possibly impacting loan growth. Further weaknesses in small business growth and with the consumer are headwinds, but with a low valuation, FUNC appears to be a good value.
For further details see:
First United: A Cheap Regional Bank With A Rising Dividend