2023-09-14 08:06:28 ET
Summary
- PNC Financial stock gets upgraded to Strong Buy, from my buy rating in June. This is more bullish than the consensus from analysts & the quant system.
- Positives: near 5% dividend yield, earnings YoY growth, valuation vs. sector, current share price, company financial strength.
- Risk of exposure to office loans is less than 3% of overall loan book.
Research Summary
Today I'll be revisiting PNC Financial ( PNC ) in the financials sector, the large US banks subsector.
I last reviewed this stock on June 15th when I rated it a bu y. Since then, it had its FY2023 Q2 earnings results on July 18th and I will do a deep dive into some of that data to see if my prior rating stands.
Since my last buy rating 3 months ago, the share price has come down again by 3.5%:
PNC - price since last rating (Seeking Alpha)
For readers less familiar with this company, here are a few relevant points from their website that I think could be interesting to readers: trades on the NYSE, $558B in assets, around 2,400 branches, business segments diversified across retail banking / asset management / corporate & institutional banking. Headquartered in Pittsburgh.
Two key peers of this company, according to Seeking Alpha data, are Mizuho Financial ( MFG ) and Intesa Sanpaolo ( OTCPK:ISNPY ), which is actually a major regional financial group in southern Europe, based in Italy. All three have a similar market cap range of $44B - $49B.
Rating Methodology
Using a streamlined, structured process similar to 5 project phases in project management, I break down my overall holistic rating of this stock into 5 categories I rank individually and of equal weight: dividends, valuation, share price, earnings growth, company financial health.
If I recommend this stock on at least 3 of 5 categories, it gets a hold rating. 4 of 5 gets a buy, and less than 3 gets a sell rating. Then I compare my rating to the consensus from analysts, Wall Street, and the SA quant system.
Then, I explain any upside or downside risks to my outlook.
Dividends
In this category, I will analyze the dividends of this stock and whether I think they present an opportunity for dividend-income investors. The data comes from official Seeking Alpha dividend info .
As of the writing of this analysis, the forward dividend yield is 4.97% , with a payout of $1.55 per share on a quarterly basis, with a most recent ex-date of July 14th. In my opinion, a near 5% dividend yield certainly grabs my attention, and the next question is how it relates to the overall sector it is in.
When comparing to its sector average, this dividend yield is 29% above its sector average.
I believe this is a positive point to consider for dividend investors who are comparing multiple stocks in which to invest. In my opinion, my target range is 3% - 5%, to stay within a few points of the sector average. In this case, the yield seems modestly above average , and even got a B grade from Seeking Alpha which adds confidence.
PNC - div yield vs sector (Seeking Alpha)
In looking at the 5-year dividend growth for this stock, it has shown a positive growth trend. This is, in my opinion, a positive point for dividend investors and a sign of this firm's capacity to return capital back to shareholders.
Additionally, I am looking for stability with dividend payouts, and this stock has shown regular quarterly dividend payment history lately without interruption, which is a positive point to think about. In particular, for readers who depend on the quarterly dividend income, this table shows that it actually went up three times in the period since 2021, now offering a payout of $1.55 per share.
Based on a wholesome view of the evidence, I would recommend this company in the category of dividends.
Valuation
In this category, I will analyze the valuation of this stock. The data comes from official valuation info on Seeking Alpha, specifically the forward P/E ratio and forward P/B ratio, the key metrics I look at.
This stock has a forward P/E ratio of 9.49 , which is 1% below its sector average.
I think that a reasonable price to earnings for this stock would be between 8x earnings and 10x earnings, to stay within a reasonable 2-point range of the average. In this case, on this metric the stock appears nearly in line with vs its overall sector, which I consider a good valuation.
PNC - P/E ratio (Seeking Alpha)
This stock has a forward P/B ratio of 1.14 , which is 14% above its sector average.
I think that a reasonable price-to-book value for this stock would be between 0.50x book value and 1.5x book value, to stay within a 1/2 point range of the average. In this situation, this stock appears only slightly overvalued vs its overall sector.
I would mention that I don't have one perfect valuation number, but rather a "range" I consider reasonable for a stock. For example, if it is 300% less than its sector average, that would indicate perhaps a recent drastic price drop, which may need further investigating as to the "why" behind that.
PNC - P/B ratio (Seeking Alpha)
Based on the examples I gave above, I would recommend this stock on the basis of valuation.
Share Price
Next, I determine if the current share price is a potential buying opportunity based on my portfolio goal of buying at current price, holding for 1 year until Aug. 2024, and achieving an unrealized gain of +10%.
The price chart (as of the writing of this article) shows a share price of $124.85, compared to its 200-day simple moving average "SMA" of $136.65 , over the last 1-year period. I like using the 200-day SMA as it is a long-term trend indicator that smooths out the trend nicely.
Next, I plug in the current SMA and share price into the following simulator I created, which simulates unrealized gains & losses if the share price as of Aug. 2024 reaches +10% above the current SMA but also if it drops -10% below the current SMA, since I want to test both scenarios:
In the above simulation, my goal is to meet or exceed a +10% unrealized gain in 1 year, and I have a maximum loss tolerance of -10% unrealized loss.
Based on the simulation results testing the current buy price, I exceed my goal on capital gains because my unrealized gain is projected to be +20.40%. My unrealized loss is projected to be -1.49%, so it is also within goal for loss tolerance.
In this case, I would recommend the current buying price which I think presents a value-buying opportunity for a longer-term investor.
Since every investor has different profit goals and risk profiles, consider this simulator just a general framework to help think about this stock in a longer-term sense, and also is not best for a short-term day-to-day trading scenario.
Earnings Growth
In this category, I examine the earnings trends over the last year, looking at both top-line and bottom-line results but also any relevant company commentary from the last earnings results.
This being a major bank in the US, I find it relevant to talk about their YoY net interest income, which saw positive YoY growth. I believe this is in line with the rate environment we have been in through the last year, but also I think it will continue since there is no immediate indication the Fed will lower interest rates.
In addition, the total revenue saw YoY positive growth, another great sign for this company I think. Non-interest revenue drivers of this firm are service charges, trust income, gains on sale of investments, and so on, so it does have a diversified revenue base.
Now, for the bottom line. I was modestly impressed, as the company achieved a YoY growth a net income, albeit a very small one.
Again, this being a bank, I want to call out two data points that should be of interest to readers: growth in the bank's interest-earning assets such as loans and fixed-income securities.
For example, not only have loans grown on a YoY basis but so has the average yield earned on the loans, which is a driver of earnings so I think it's worth mentioning in this section, and those that follow banking know that lending has long been the "core" business of banks, among other things of course.
The other interest-earning item is fixed-income securities, and on a YoY basis they have grown but so has the average yield they earn. In addition, it seems on average they are shorter-term (under 5 years) in duration, which in my opinion is a positive because I think shorter-term bonds pose lower risk than 30-year bonds for instance.
PNC - YoY growth in securities (PNC q2 presentation)
Based on this evidence as whole, I would recommend in this category and expect continued strong results in the next quarter that meet or exceed the prior results, since the firm seems to have the momentum already.
Financial Health
In this category, I will discuss whether the overall company shows strong financial fundamentals beyond just things like dividends, valuation, earnings and share price, with a focus on the capital strength.
Below are some relevant points to call out from their Q2 presentation . For example, their CET1 ratio of 9.5% is well above regulatory benchmarks, but another positive sign is their ability to increase dividends as well.
Worth mentioning here is CEO Bill Demchak's comments in the Q2 earnings results that gave confidence and called out the recent Fed stress test of banks as well:
Federal Reserve's annual stress test recently demonstrated PNC’s through-the cycle financial strength and stability, and starting in the fourth quarter, our stress capital buffer requirement will improve to the regulatory minimum of 2.5%. In consideration of our strong capital levels and the board's confidence in our strategy and outlook, in July the board approved a 5-cent increase to our quarterly stock dividend.
Here are some more data points from the earnings release comments that would support a bullish sentiment on this company:
PNC's average LCR("liquidity coverage ratio") for the three months ended June 30, 2023 was 109%, exceeding the regulatory minimum requirement throughout the quarter.
Federal Reserve Bank balances at June 30, 2023 were $37.8 billion, increasing $5.3 billion.
Based on the data, I recommend in this category, and consider it a firm with solid fundamentals.
Rating Score
Today, this stock was recommended in 5 of my 5 rating categories, therefore being upgraded from my rating of "buy" in June to a strong buy rating at this time.
This is more bullish than the consensus from both analysts, Wall Street, and the quant system.
PNC - rating consensus (Seeking Alpha)
My Rating vs Downside Risk
My bullish rating can face a downside risk as follows:
Although in my June rating I only briefly mentioned it as a risk, here I would like to discuss the issue of exposure to office loans, as I expect many investors and analysts being bearish on banks after seeing headlines about that sector struggling due to remote work.
For instance, the following chart shows from an early August article in financial portal MarketWatch highlights the rising delinquency rates of office property, much more so than industrial or multifamily residential properties.
However, my bullish sentiment remains since according to the company's own Q2 presentation it appears their exposure to office property is less than 3% of the total "CRE" loan book, and a much bigger exposure is in multifamily property, which poses a much lower risk of delinquency according to the prior chart.
Analysis Wrap-up
To wrap up today's discussion, here are the key points we went over:
This stock got upgraded to a strong buy rating today.
Its positive points are: dividends, valuation, share price, earnings growth, company financial health.
Downside risks have been addressed.
In closing, I continue to keep PNC on my watchlist of financial stocks, particularly since Wikipedia has it listed as #8 on largest banks in the US .
For further details see:
PNC Financial: Upgrade To Strong Buy, Near 5% Dividend Yield