One of the most-maligned industries of the market this year is Banking – more specifically, regional banks.
Rising interest rates – which the Fed has confirmed aren’t likely to end until later this year, and possibly next – naturally blunt demand for commercial, residential and consumer lending. More recently, uncertainty has increased around regional banks, fueled by the highly publicized failures of Silicon Valley Bank and Signature Bank in the first quarter of this year. In both cases had at least portions of their demise attributed to the impact of high interest rates on their own operations and were exacerbated by massive withdrawals. For most of this week, I’ve been drilling down into more of these regional players, and while a lot of “experts” continue to call regionals a risky part of the Banking industry, I’m seeing something very different. The fact is that regional bank-focused market uncertainty may remain, but it’s also become clear that there are a number of regionals that sit on very solid footing, with valuations that now sit at compelling levels.
With that, today’s post focuses on a regional U.S. bank that focuses primarily on the Midwestern areas of the country, Huntington Bancshares Inc. (HBAN). Like a lot of regionals this company doesn’t get a lot of media attention when talking heads start talking about the largest banking institutions in the U.S., but they boast a very robust balance sheet with healthy liquid reserves, manageable debt, increasing cash flow and a healthy dividend that makes tempting fodder for income-seeking investors. The stock dropped from a February peak at around $15.50 to a May low at around $9. From that point the stock rallied to about $11.50 to start June before sliding back and finding its latest pivot low at around $10. Are the company’s fundamental strong enough to suggest that the stock’s current price signals a good value-driven opportunity? Let’s find out.
Fundamental and Value Profile
Huntington Bancshares Incorporated is a diversified regional bank holding company. Its segments include Commercial Banking, Consumer and Business Banking, Vehicle Finance, and Regional Banking and The Huntington Private Client Group (RBHPCG). The Commercial Banking segment provides capabilities through bankers, capabilities, and digital channels, and includes a set of product offerings. The Consumer and Business Banking segment provides an array of financial products and services to consumer and small business customers including, but not limited to, checking accounts, savings accounts, money market accounts, compact discs (CDs), investments, consumer loans, credit cards, and small business loans. The Vehicle Finance segment provides products and services that provide financing to consumers. The RBHPCG segment consists of private banking, wealth and investment management, and retirement plan services. The Company has over 1,032 full-service branches and private client group offices. HBAN’s market cap is about $15.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 18.75%, while sales were about 50% higher. In the last quarter, earnings shrank by -11.63% while sales were about 8% higher. HBAN’s margin profile is very healthy, but like a lot of regional banks is showing some signs of weakness; Net Income as a percentage of Revenues was 27.06% over the last twelve months, and slipped in the last quarter to 23.7%.
Free Cash Flow: HBAN’s free cash flow was about $3.1 billion over the past twelve months and translates to a Free Cash Flow Yield of 20.17%. It has also increased over the past year, from $2.6 billion, but did drop from $3.8 billion in quarter prior.
Dividend Yield: HBAN’s dividend is $.62 per share, and translates to an annualized yield of 5.75% at its current price. Management increased the dividend payout at the end of 2021, from $.60 per share and has held its payout steady since then.
Debt to Equity: HBAN has a debt/equity ratio of .80, which is a relatively low, manageable number. Their balance sheet shows about $10.6 billion in cash and liquid assets against a little over $13 billion in long-term debt. It should be noted that cash increased by roughly $5.7 billion in the last quarter, while long-term debt increased by the same amount. Along with their healthy operating margins and strong Free Cash Flow, the company is in an excellent financial position with very high liquidity, giving them excellent financial flexibility.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target a little below $14 per share. That means the stock is nicely undervalued, with about 28% upside from the stock’s current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart traces the stock’s movement over the last year. The diagonal red line traces the stock’s downward trend from a high at around $16 in November of last year to its low in May at about $9. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that May low, the stock rallied strongly, finding its last pivot high at around $11.50 and just a little below the 38.2% retracement line. Current support is at about $10, which is where the last pivot low appeared, with immediate resistance at around $11.60. A push above $11.60 could see upside to about $13, right around the 61.8% retracement line, while a drop below $10 should see the stock retest its yearly low at around $9.
Near-term Keys: HBAN offers a useful, interesting value proposition, and when you combine that with a very solid fundamental profile and its attractive dividend, this is a stock that I think represents a useful investing opportunity under current market conditions. If you prefer to focus on short-term trading strategies, a push above $11.60 could provide an interesting signal to buy the stock or work with call options, with $13 providing a practical, initial bullish profit target. A drop below $10 could be a signal to short the stock or buy put options, using $9 as a practical profit target on a bearish trade.