Since the early part of this year, one of the most-talked-about sectors of the economy has been the Financial sector, with a specific emphasis on the Banking industry.
From early in 2020 until the beginning of 2022, the sector was one of the biggest stars of the market. As interest rates have increased this year, however, the opposite has held true, as the sector dropped nearly -30% from its January 2022 high to its October low as measured by the U.S. Financials iShares ETF (IYF). In March of this year, bearish pressure absolutely devastated the banking industry as specialized banks like Silicon Valley Bank (tech-focused venture capital), followed by Signature Bank (real estate and cryptocurrency payment systems) collapsed under the weight of overwhelming customer withdrawals, prompting regulators with the FDIC to take over both banks to protect depositors as well as the banking system in general. Those failures created a ripple effect that has most banking stocks at or very near historical lows. The panic hit regional banks the hardest, pushing many of them to levels not seen since early in 2020.
About a month later, pressure picked up again amidst reports that First Republic Bank, which survived the initial scare with intervention via a $30 billion infusion of cash from eleven of the largest U.S. banks, lost roughly 40% of its deposits in the first quarter, raising concerns they’ll be the third failure in the U.S. since March. That concern became fact over the next weekend, as the FDIC took over the bank, selling a majority of its assets to JP Morgan (JPM) to protect existing depositors.
For some, these bank failures were signs that more bad news from the industry were just around the corner – for those who remember, much like the financial crisis that started showing its first cracks in 2006, and eventually took down several financial institutions (including the largest bank failure, Washington Mutual, in U.S history) and triggering the Great Recession that lasted through most of 2009. Since then, however, it’s become clear that the elements that prompted the massive, app-driven withdrawals that look down SVB, Signature and First Republic are not systemic in nature. In particular, a number of regional banks have been able to quiet fears about their businesses since then through their latest earnings reports and management discussions.
One of the regional banks that I like to pay attention to in this industry is Zions Bancorporation (ZION). A true regional bank, ZION provides a range of banking products and related services, primarily in the states of Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming, with products and services that include commercial and small business banking, commercial real estate lending, retail banking, and wealth management. The company boasts a very healthy balance sheet with liquid reserves well in access of debt obligations and a very attractive dividend. The stock diverged from the industry for most of 2022, hovering in a sideways trend until the fourth quarter when it dropped from a peak at around $60 to December low at around $45.50. Starting 2023, the stock rallied to about $54 before the broader industry momentum finally caught up, pushing the stock to a low point in May around $18. From that point, the stock has more than doubled in price, and as of this writing is sitting a little below $38 per share. Considering the strength of the company’s underlying fundamentals, the question now is whether the stock’s newest rally has pushed its price past the point of useful value. Let’s dive in to the numbers.
Fundamental and Value Profile
Zions Bancorporation, National Association provides a range of banking products and related services, primarily in the states of Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming. The Company conducts its operations primarily through seven separately managed bank divisions, each with its own local branding and management. Its products and services include commercial and small business banking, commercial real estate lending, retail banking, and wealth management. Its commercial business banking products and services include commercial and industrial lending and leasing, municipal and public finance services, cash management services, commercial card and merchant processing services, and capital markets, syndication, and foreign exchange services. Its retail banking products and services include residential mortgages, home equity lines of credit, personal lines of credit and installment consumer loans, and personal trust services. ZION’s market cap is about $5.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by -13.95%, while sales were about 49.5% higher. In the last quarter, earnings declined by about -16.5% while sales were almost 8% higher. ZION’s margin profile is very healthy, but has weakened; Net Income as a percentage of Revenues was 21.43% over the last twelve months, and dropped in the last quarter to 15%.
Free Cash Flow: ZION’s free cash flow was about $1.2 billion over the past twelve months and translates to a Free Cash Flow Yield of 23.31%. It has also increased over the past year, from $926 million, but did decline a bit, from about $1.3 billion in the quarter prior.
Dividend Yield: ZION’s dividend is $1.64 per share, and translates to yield of 4.58% at its current price. It has also increased from $1.52 per share after the first quarter of 2022, which further confirms the company’s overall fundamental strength.
Debt to Equity: ZION has a debt/equity ratio of .11, which is very conservative. Their balance sheet shows a little over $3 billion in cash and liquid assets against just $538 million in long-term debt. It should be noted long-term debt increased to nearly $13 billion in the quarter prior, but then quickly dropped to its current level. The company is in an excellent financial position with very high liquidity.
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 at around $50.50 per share. That means the stock is very undervalued, with about 33.5% upside from the stock’s current price. It’s also worth nothing that a quarter ago, this same analysis yielded a fair value target price of $41.50 per share.
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 $60 in September of last year to its low, reached in May at around $18. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s rally from that low has pushed the stock a little below the 50% retracement line to mark immediate resistance at around $38, with current support expected at around $34. A push above $38 should have upside to about $44, where the 61.8% retracement line sits, while a drop below $34 should find next support at around $31 based on pivot activity seen in that range throughout March, the early part of April, and a pivot high in early June.
Near-term Keys: ZION offers a very tempting value-based opportunity at its current price, even with the stock’s impressive rally from its yearly low. If you prefer to focus on short-term trading strategies, a push above $38 could provide a good signal to buy the stock or work with call options, with $44 providing an attractive bullish profit target. A drop below $34 could be a signal to short the stock or buy put options, using $31 as a practical profit target on a bearish trade.