Banking company Western Alliance Bancorporation is taking Wall Street by surprise today, falling to $47.84 and marking a -4.7% change compared to the S&P 500, which moved -1.0%. WAL is -18.51% below its average analyst target price of $58.71, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Western Alliance Bancorporation has underperfomed the S&P 500 by -49.0%, moving -35.0%.
Western Alliance Bancorporation operates as the bank holding company for Western Alliance Bank that provides various banking products and related services primarily in Arizona, California, and Nevada. 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.
Western Alliance Bancorporation's trailing 12 month P/E ratio is 5.8, based on its trailing EPS of $8.18. The company has a forward P/E ratio of 5.8 according to its forward EPS of $8.23 -- 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.
One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Western Alliance Bancorporation market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.
Dividing Western Alliance Bancorporation's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -0.47. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Western Alliance Bancorporation was $2.39 Billion as of its last annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $364.31 Million and they've been growing at an average rate of 0.0%. WAL's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 2.9% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
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. Western alliance bancorporation's P/B ratio of 0.96 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 irregular cash flows with a flat trend, Western Alliance Bancorporation is likely undervalued at today's prices. The company has mixed growth prospects because of a PEG ratio of less than 1 and decent net margins with a stable trend. We hope you enjoyed this overview of WAL's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
