People’s United Financial stock (NASDAQ: PBCT) is approximately at the same level as the March 23 low of this year, and at the current price of around $10 per share, we believe the stock has more to go based on its historical P/E multiples. The bank, which mainly offers retail and commercial banking services, has seen its stock remain around $10 since the recent bottom compared to the S&P which increased around 55%. The stock is lagging the overall markets by a huge margin, as investors are overly cautious about its loan portfolio due to a negative GDP scenario and higher unemployment driven by the economic slowdown. Further, the stock is down 36% from levels seen at the end of 2019.
People’s United Financial’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. We feel that the company’s stock still has potential and its valuation implies it has further to go.
Some of the rise over the last 2 years could be attributed to roughly 27% growth seen in People’s United Financial’s revenues from FY 2017 to FY 2019, which translated into a growth of 57% in the net income. The higher growth in net income figure was driven by a slight drop in non-interest expenses as a % of revenues, which improved the adjusted net income margin from 22.2% to 27.5% over the same period.
While the company has seen steady revenues and earnings growth over FY 2017-19, its P/E multiple has decreased. We believe the stock is likely to see a significant upside despite the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove 37% Change in People’s United Financial Stock Between FY 2017 And Now? has the underlying numbers.
People’s United Financial’s P/E multiple changed from 17x in FY 2017 to close to 13x in FY 2019. While the company’s P/E is just above 8x now, there is an upside when the current P/E is compared to levels seen in the past years – P/E of about 13x at the end of FY 2019 and around 10x at the end of FY 2018.
So what’s the likely trigger and timing for the upside?
People’s United Financial offers commercial banking, retail banking, and wealth management services to individual, corporate, and municipal customers. While the company’s revenues have increased in Q1 and Q2 on a year-on-year basis, its stock price is still down 36% YTD. This is because the Covid-19 crisis and the economic slowdown have significantly increased the risk of loan defaults due to negative GDP growth and the higher unemployment rate. However, the company has increased its provisions for credit losses by approximately 10 times to offset this risk. We believe that the stock is likely to move up once the Covid scenario subsides and the loan repayment capacity of its customers improves. Further, all banks are expected to resume share buyback programs in 2021.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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