One of Wall Street's biggest winners of the day is F.N.B., a regional banking company whose shares have climbed 3.3% to a price of $13.54 -- 12.95% below its average analyst target price of $15.56.
The average analyst rating for the stock is buy. FNB outperformed the S&P 500 index by 3.6% during today's afternoon session, and by 7.6% over the last year with a return of -0.2%.
F.N.B. Corporation, a financial holding company, provides a range of financial services primarily to consumers, corporations, governments, and small- to medium-sized businesses. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
F.N.B.'s trailing 12 month P/E ratio is 12.0, based on its trailing EPS of $1.13. The company has a forward P/E ratio of 8.2 according to its forward EPS of $1.65 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US financial services companies is 13.34, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide F.N.B.'s P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.82. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing FNB's growth potential .
F.N.B.'s financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ MM) | Capital expenditures ($ MM) | Free Cash Flow ($ MM) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 530 | -58 | 472 | 555.56 |
| 2020-12-31 | 113 | -41 | 72 | -66.2 |
| 2019-12-31 | 259 | -46 | 213 | n/a |
- Average free cash flow: $252,333,333.30
- Average free cash flown growth rate: 244.7 %
- Coefficient of variability (lower numbers indicating more stability): 80.4 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in FNB have received an annualized dividend yield of 3.7% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
F.N.B.'s P/B ratio of 0.9 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Financial Services sector was 1.95 as of the third quarter of 2022.
F.N.B. is by most measures undervalued because it has a very low P/E ratio, an exceptionally low P/B ratio, and an irregular stream of positive cash flows with an upwards trend. The stock has strong growth indicators because it has a a PEG ratio of less than 1 and consistent net margins with a positive growth rate. We hope you enjoyed this overview of FNB's fundamentals.
