1. Valuation ratio analysis
I have analyzed the health of Northwest Savings Bank (Ticker Symbol: NWBI), hereafter referred to as Northwest, with several relevant valuation ratio. These ratios are useful to determine whether its stock is currently undervalued or overvalued. These presents a kind of measure as to whether the stock is a potential buy or otherwise. We have also made comparisons between Northwest and its competitors, which includes PNC Bank (Ticker Symbol PNC) and Erie Bank (a division of CNB Bank, Ticker Symbol CCNE. Table 1.1 gives an overview of the financial data that we will be using for the calculations in this analysis. The data from Northwest, PNC and Erie are extracted from Yahoo Finance (Northwest Bancshares, n.d.), (The PNC Financial Services Group, n.d.), (CNB Financial Corp, n.d.).
The P/S ratio is calculated by taking the ratio of the price per share to the revenue or sales per share of a company. In the case of Northwest, the bank has a P/S ratio of 3.71, whereas the benchmark average stands at a ratio of 2.97, clearly smaller than Northwest. This indicates that investors perceives Northwest as more valuable compared to its competitors for every dollar of revenue earned by the bank. This is a good sign for Northwest, and is an indicator for a buy on its stock.
In fact, based on the benchmark average P/S ratio, and the sales per share of Northwest, we estimate that the market price of Northwest to be $9.85. The estimation of the Northwest stock price is lower by about 20% compared to the actual price for Northwest as perceived by the market which is currently at $12.34. This indicates that the investors of Northwest are anticipating an increase in its revenue or sales in the immediate future. We thus have a positive outlook on Northwest based on its P/S ratio.
- P/E ratio
The P/E ratio is calculated by taking the ratio of the price per share to the earnings per share of a company. In the case of Northwest, the bank has a price to earnings of 17.60, higher than the benchmark average of 11.49. This indicates that investors are willing to pay more for Northwest for each dollar of the earning of Northwest compared to its competitors. This also indicates that the investors of Northwest are anticipating an increase in its earnings in the immediate future. This is a good sign for Northwest, and is an indicator for a buy on its stock.
In fact, based on the benchmark average P/E ratio, and the earnings per share of Northwest, we estimate that the market price for Northwest to be $8.04. This estimation is lower by about 35% compared to the price as perceived by the market which is currently at $12.34 as of October 28, 2014. This suggests that the market perceives Northwest as fundamentally stronger than its competitors, thus reinforcing the conclusion made previously by using the P/E ratio. We thus have a positive outlook on Northwest based on the P/E ratio.
1.3 Market-to-Book ratio
The market-to-book ratio is calculated by taking the ratio of the market value per share to the book value per share of a company. In the case of Northwest, the bank has a market to book ratio of 1.09, whereas the benchmark average stands at a ratio of 1.21, which is bigger than that of Northwest. This indicates that the market value of Northwest’s competitors is perceived by the market to be higher than Northwest itself compared to their book value.
1.4 Summary of Valuation Ratios
In Table 1.2, we give a summary of the outlooks of each valuation ratio which we have mentioned previously in Section 1. In view of the ratios calculated in this Section, we have an overall positive outlook on Northwest.
Here, we use the dividend discount model to estimate the price of the stock. Our analysis points to us that we should be expecting a minimum of 8% return on our investment in Northwest, if we make one. Using this, and our dividend forecast for Northwest, we estimate that Northwest’s stock should reach $10.20 per share. At its current stock price of $12.34 per share, Northwest has already passed its value as estimated by the dividend discount model. In view of this, Northwest is expensive based on this valuation.
The following Table 2.1 shows our dividend forecast for Northwest which we have used to calculate the estimated price of $10.20. This Table is also useful for investors wanting to earn yearly dividend by holding on its stock.
Based on my analysis, I believe that the price per share of Northwest Savings Bank is expensive, and does not represent a good buying opportunity for the stock. This is supported by the dividend discount model valuation, P/S ratio and P/E ratio. According to the dividend discount model, Northwest will reach $10.20 per share from its current market value in the immediate future, possibly within a year.
Nevertheless, there is a yearly dividend at a positive growth rate distributed to the shareholders of Northwest, which is an extra incentive to potential investors. The last paid dividend amounted to $0.52. This is the highest amount since 2011, and is anticipated to keep increasing each year. Our forecast for the dividend in 2015 is $0.56. Beyond 2019, we predict that the dividend will have a sustainable growth rate of 1.51%.
Works Cited
CNB Financial Corp. (n.d.) Yahoo Finance. Retrieved from
http://finance.yahoo.com/q/ks?s=CCNE+Key+Statistics
Northwest Bancshares. (n.d.) Yahoo Finance. Retrieved from
http://finance.yahoo.com/q/ks?s=NWBI+Key+Statistics
The PNC Financial Services Group. (n.d.) Yahoo Finance. Retrieved from
http://finance.yahoo.com/q/ks?s=PNC+Key+Statistics
Appendix of calculations
The following are detailed calculations for the valuation ratio analysis, and the Dividend Discount Model valuation analysis.
P/S ratio for Northwest = price per share/revenue per share
= 12.32/3.32
≈ 3.71
P/S ratio for PNC = 82.8628.48≈2.909
P/S ratio for CCNE = 17.15.65≈3.027
Benchmark Average for P/S = 122.909+3.027≈2.97
Price estimation for Northwest = 122.909+3.0273.32≈9.854 ≈$9.85
P/E ratio for Northwest = price per share/earnings per share
= 12.32/0.70
= 17.60
P/E ratio for PNC = 82.867.36=11.258
P/E ratio for CCNE = 17.11.46=11.712
Benchmark Average for P/E = 1211.258+11.712≈11.49
Price estimation for Northwest = 1211.258+11.7120.70≈8.040 ≈ $8.04
Market/Book ratio for Northwest = market value per share/book value per share
= 12.32/11.34
≈ 1.09
Market/Book ratio for PNC = 82.8676.77=1.079
Market/Book ratio for CCNE = 17.112.69=1.348
Benchmark Average for Market/Book ratio = 121.079+1.348≈1.21
Price estimation for Northwest = 121.079+1.34811.34≈13.761 ≈$13.76
Stock price of Northwest based on all 3 valuation ratios = 13(9.854+8.040+13.761)
≈$10.55
Dividend Discount Model Validation
Dividend payout ratio = dividend per share/earnings per share
= 0.520.70
Sustainable growth rate = ROE(1 – dividend payout ratio)
= 0.0588(1 – 0.52/0.7)
= 0.015120
= g (equalled to dividend growth rate)
Price, P0 = D01+gR-g =0.521+0.0151200.08-0.015120,
where R = required return = 0.08
Price, P0 ≈ $8.14
Use sustainable growth rate, g
Estimated price, P0=0.56(1+0.08)+0.601.082+0.641.083+0.681.084+0.721.085+0.721.0851+0.0151200.08-0.015120≈$10.20
