In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid bank in which to invest, because they require specific achievements over the historical period. Â Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation. Â We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before. Â By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value toÂ get a sense of whether the company is a good investment. Â In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Zions Bancorporation fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Zions Bancorporation is a financial holding company. The Company focuses on providing community banking services by its core business lines of small and medium-sized business and corporate banking; commercial and residential development, construction and term lending; retail banking; treasury cash management and related products and services; residential mortgage; trust and wealth management, and investment activities. The Company owns and operates eight commercial banks with a total of 480 domestic branches in 10 western and southwestern states as of December 31, 2012. The Company provides a range of banking and related services through its banking and other subsidiaries, primarily in Utah, California, Texas, Arizona, Nevada, Colorado, Idaho, Washington, and Oregon. As of December 31, 2012, net loans and leases accounted for 67.9% of total assets.
Defensive Investor – must pass all 6 of the following tests: Score = 3/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 2/3
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$0.36|
|Value Based on 0% Growth||$0.21|
|Market Implied Growth Rate||605.89%|
Balance Sheet – 9/30/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Zions Bancorporation does not pass the requirements of either the Defensive Investor or the Enterprising Investor. Â The company presents too much risk for the Defensive Investor, after failing to have sufficient earnings stability or growth over the ten year historical period and currently trading at a high PEmg ratio. Â The company also presents slightly more risk than the Enterprising Investor is willing to accept, as it has not had the requisite earnings stability in the five year historical period. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should seek out other opportunities, such as through a review of ModernGraham’s valuation of People’s United Financial (PBCT) or other companies that pass the ModernGraham requirements. Â The company also fares rather poorly in the ModernGraham valuation model, as a result of the very weak EPSmg (normalized earnings) for 2013. Â The company has improved its EPSmg substantially, from -$2.08 in 2009 to $0.02 for 2013, but until that figure is considerably higher, the valuation will continue to be poor.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Zions Bancorporation (ZION)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave a comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Zions Bancorporation (ZION) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.