BNC Bancorp: An Undervalued Play On A Recovery?

Jul.20.12 | About: BNC Bancorp (BNCN)

BNC Bancorp (BNCN) is a bank holding company for the Bank of North Carolina, a full service commercial bank providing a range of services. With a 2.59% dividend yield and a 17.04x price-earnings ratio, the stock appears to be intrinsically undervalued and potentially positioned for strong growth, especially if a broad economic recovery takes hold.

Relatively Solid Fundamentals…

BNC has experienced steady organic growth throughout its 21-year history, despite of course its 50%+ retracement since the financial crisis in 2008. But unlike some banks, the company opted to take advantage of the environment and make some strategic acquisitions. The firm purchased one bank in 2010, two in 2011, and expect to close another in Q2 or Q3 of this year.

Even after these acquisitions, the bank appears cheap relative to many of its industry peers, like Hampton Roads Bancshares (HMPR), Old Line Bancshares (OLBK), and NewBridge Bancorp (NBBC). For instance, the firm has the lowest EV/Revenue of any of its peers at just 1.47, after posting an 8.5% jump in interest income and 22.6% jump in net income last quarter.

… An Attractive Valuation & Dividend…

BNC trades with a price-earnings multiple of 17.04x, price-book value of 0.61 and a PEG ratio of below 1.0, which all suggest that the stock is undervalued. While much of this may be due to the macroeconomic climate, the stock is still undervalued relative to many of its peers and could be an exceptional investment, if the U.S. economy recovers.

The stock also trades with a 2.59% dividend yield that it has consistently paid out, despite the economic downturn, since 2004. Moreover, the dividend yield has been on the rise in recent years, as the economy has stabilized from its lows in early 2009. Still, income investors willing to accept some risk may want to investigate this stock further.

…But a Little Pricey and Risks Remain

Despite the attractive valuation, there are some key risks that remain. The bank is trading near its 52-week high of $8.41 per share and trades with a P/E multiple that's some 8% higher than its average. The bank has also taken on debt to finance its acquisitions, which is a somewhat risky strategy, although capital ratios remain healthy.

In the end, income investors looking to take a little risk and believe the U.S. economy may have put the worst behind it may want to consider this stock. Other comparable banks, such as Old Line Bancshares also appear to be undervalued and worthy of some consideration. But some risks remain that may keep a lid on this stock's appreciation in the near-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.