Today shares of Western Alliance Bancorporation have fallen -6.8%, to a price of $59.62. Since it has an average rating of buy, many investors will be using today as an opportunity to buy the dip. But what if the stock is overvalued? Don't blindly trust analyst ratings before looking at the fundamentals yourself!
Western Alliance Bancorporation has a P/E ratio of 9.1 based on its 12 month trailing earnings per share of $6.54. Considering its future earnings estimates of $9.31 per share, the stock's forward P/E ratio is 6.4. In comparison, the average P/E ratio of the Finance sector is 12.38 and the average P/E ratio of the S&P 500 is 15.97.
Western Alliance Bancorporation's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a -0.61 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is negative, the company's lofty valuation is not justified by its growth levels.
We can also compare the ratio of Western Alliance Bancorporation's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present equity value -- or what is left over when we subtract its liabilities from its assets. WAL has a P/B ratio of 1.12, with any figure close to or below one indicating a potentially undervalued company.
Now we turn to the actual cash that Western Alliance Bancorporation has on hand after all of its inflows and outflows of capital have been accounted for -- including non business related items such as the cost of maintaining its debt. This final bottom line is called levered free cash flow, and for Western Alliance Bancorporation it stands at -$19.2 Million. This negative cash flow could mean the company may not be able to sustain its 2.3% dividend for much longer.
With most indicators pointing at a higher than average valuation with uncertain growth prospects, most analysts are either wrong about Western Alliance Bancorporation, or their research has uncovered one or more qualitative reasons to invest in the stock. For example, the strength of the management team and their plan for executing the business strategy may have convinced some analysts to give less weight to traditional quantitative factors.
