Bank Of The Ozarks: Dip Buying

| About: Bank of (OZRK)

Summary

Bank of the Ozarks has lost nearly 20% in the last month.

The bank continues rolling up small banks with a large accretive benefit.

The bank isn't without risk due to the acquisition spree, but the valuation is compelling.

 Bank of the Ozarks

Bank of the Ozarks (NASDAQ:OZRK) is an amazing story that most investors probably don't have on their radar. The small banking institution is now working on the 15th acquisition since March 2010 to dramatically grow beyond the original Arkansas base. During the acquisition spree, the stock has soared.

OZRK Chart

OZRK data by YCharts

The recent dip in the markets might provide a rare entry point. The stock is down $10 from the recent highs of $55 despite market leading growth for a financial. Investors might question the aggressive acquisition spree of the bank, but the general conservative nature of the sector valuations might provide the prime benefit for making accretive deals.

Recent Deals

The most recent deal might be one of the most impressive. Back in November, Bank of the Ozarks agreed to purchase C1 Bank (BNK) in a substantially accretive deal. The amounts almost seem like free money.

According to the details, Bank of the Ozarks will pay $25 per C1 share. The deal is immediately accretive to book value and tangible book value per share. At the same time, Bank of the Ozarks will see an accretive boost to EPS including transaction costs with a $0.07 to $0.10 boost for the second year after closing the deal.

So for a bank forecasted to earn $2.51 this year, the company expects an easy $0.10 boost from the C1 deal alone. Yet, this deal isn't the only one.

Bank of the Ozarks also bought Community & Southern Holdings in an accretive deal to book value, tangible book value and earnings per share. The bank didn't provide any specifics on the CSB deal, but the amount no doubt contributes to the surging expectations for 2017 earnings.

On top of these acquisitions, the unfunded balance of closed loans and non-purchased loans both continue surging. The unfunded balances surged another $939 million for the quarter to end the year at a new record of $5.8 billion while non-purchased loans hit quarterly records.

The combination of the above items has EPS expectations surging from the reported $2.07 for 2015 to an incredible $3.21 in 2017. As well, those estimates continue to rise.

Compelling Valuation

With the calendar rolling over to a new year, the market starts looking forward to 2016 and 2017 earnings estimates. With 2015 hanging around and Bank of the Ozarks trading near $55 back in December, the stock appeared slightly expensive with an EPS of only $2.07.

The following chart encompasses how the P/E ratio quickly drops due to the stock price declines and looking forward to the forecasted EPS numbers. The P/E ratio quickly drops from over 27 as the year was ending to a low of 15 when looking forward to earnings out one year.

OZRK PE Ratio (Forward 1y) Chart

OZRK PE Ratio (Forward 1y) data by YCharts

Takeaway

Despite large gains over the last few years, Bank of the Ozarks is actually a relatively cheap stock. The ability to grow loans without seeing any uptick in credit problems is a very positive sign. If anything, the current weak environment plays into the strengths of the bank. As the market trades on recession fears, the bank can continue rolling up smaller banks on the cheap.

The recommendation is to use the dip to start building up a position in Bank of the Ozarks.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OZRK over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.