Banking company Webster Financial is taking Wall Street by surprise today, falling to $38.55 and marking a -3.5% change compared to the S&P 500, which moved 0.0%. WBS is -23.87% below its average analyst target price of $50.64, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Webster Financial has underperfomed the S&P 500 by -24.0%, moving -13.7%.
Webster Financial Corporation operates as the bank holding company for Webster Bank, National Association that provides a range of financial services to individuals, families, and businesses in the United States. 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.
Webster Financial's trailing 12 month P/E ratio is 7.6, based on its trailing EPS of $5.1. The company has a forward P/E ratio of 6.1 according to its forward EPS of $6.34 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the finance sector has an average P/E ratio of 14.34, and the average for the S&P 500 is 15.97.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide Webster Financial's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.34. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Webster Financial's free cash flow, which was $1.31 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $654.15 Million and they've been growing at an average rate of 47.2%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in WBS have received an annualized dividend yield of 4.0% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Webster financial's P/B ratio of 0.84 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 Finance sector was 1.57 as of the first quarter of 2023.
Since it has a very low P/E ratio, an exceptionally low P/B ratio, and a pattern of improving cash flows with an upwards trend, Webster Financial is likely undervalued at today's prices. The company has strong growth indicators because of a PEG ratio of less than 1 and average net margins with a stable trend. We hope you enjoyed this overview of WBS's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
