Standing out among the Street's worst performers today is East West Bancorp, a banking company whose shares slumped -3.0% to a price of $50.14, 24.86% below its average analyst target price of $66.73.
The average analyst rating for the stock is buy. EWBC lagged the S&P 500 index by -3.0% so far today and by -34.0% over the last year, returning -19.2%.
East West Bancorp, Inc. operates as the bank holding company for East West Bank that provides a range of personal and commercial banking services to businesses and individuals. The company is part of the financial services sector, alongside a staggering variety of banking, mortgage, insurance,and credit service companies. If there is one common denominator among all companies in the sector, it’s that they are all dedicated to maintaining and developing new systems for the storage and transfer of value and risk.
East West Bancorp's trailing 12 month P/E ratio is 5.9, based on its trailing EPS of $8.53. The company has a forward P/E ratio of 6.0 according to its forward EPS of $8.33 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US finance companies is 14.34, 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.
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 East West Bancorp'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 0.76. 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 East West Bancorp's free cash flow, which was $2.07 Billion as of its most recent annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, EWBC is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 29.9% and has on average been $1.16 Billion.
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. East west bancorp's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.12, but is still below the average P/B ratio of the Finance sector, which stood at 1.57 as of the first quarter of 2023.
Since it has a very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with an upwards trend, East West Bancorp is likely undervalued at today's prices. The company has strong growth indicators because of a PEG ratio of less than 1 and strong net margins with a stable trend. We hope you enjoyed this overview of EWBC's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
