* All data are as of the close of Friday, October 17, 2014.
As one of the hardest hit regions during the 2008-09 financial crisis, banks in the northeast region of the nation have managed to rebound a little better than most other regions since.
From the start of June 2007 until the deepest depth of the crisis on March 9th, 2009, where the broader market S&P 500 index [black] fell 55% and the Financial Select Sector SPDR ETF (NYSE: XLF) [blue] fell 84%, America's 3 largest Northeast Regional Banks - M&T Bank Corporation (NYSE: MTB) [beige], Webster Financial Corp. (NYSE: WBS) [purple] and Fulton Financial Corporation (NASDAQ: FULT) [orange] - were similarly devastated, their stock values plunging 71%, 93% and 65% respectively.
Where the broader market S&P 500 index [black] has grown some 180% and the financial sector XLF [blue] has gained 250% since March of 2009, Fulton has underperformed with gains of 97%, M&T has moderately outperformed with gains of 255%, while Webster has left all in its dust with gains of 800%.
On an annualized basis, where the S&P broader market has averaged 32.24% per year and the XLF has averaged 44.78% per year since March of '09, Fulton has averaged 17.37%, M&T has averaged 45.67%, while Webster has averaged a stunning 143.28% per year!
While the regional banking industry is still expected to vastly outperform the broader market and financial sector this Q3, its earnings growth is seen slowing in Q4, though still growing at an astronomical rate. Growth should continue to slow in 2015, while still outperforming slightly as tabled below, where green indicates outperformance while yellow denotes underperformance.
Zooming-in to the Northeast Regional Banks industry, our three highlighted stocks of M&T, Webster and Fulton are all expected to underperform their industry peers almost throughout. Yet among them, the three are seen continuing their split performances, with Fulton's earnings growth shrinking this Q3 and Q4, Webster's maintaining and M&T's improving. Next year M&T is seen growing the fastest, while Webster owns the next five years.
Compared to the broader market S&P 500 index, M&T is seen outperforming modestly for the remainder of this year and next, while all three seem poised to underperform over the longer term.
But there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three banks compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recent reported quarter, Webster provided the greatest revenue and earnings growth of the three by a comfortable margin, while M&T experienced shrinkages.
Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Webster operated with the widest of margins, while M&T and Fulton split last spots between them - though all three were quite close to one another.
Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
In returns on assets and on equity, M&T's management team performed best by a notable margin, while Webster's and Fulton's teams split last spots between them.
Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three banks here compared, Webster provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price with Fulton immediately behind, while M&T provides the least.
Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Fulton has the cheapest stock price relative to forward earnings and company book value, while Webster's stock is cheapest relative to 5-year PEG. M&T's stock is the most overvalued relative to earnings and book, while Fulton's is overpriced relative to 5-year PEG.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Webster offers the best earnings percentages in all four time periods, while M&T offers the worst EPS percentage over current stock price in all periods - although all three banks are quite close to one another.
Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, both M&T and Webster outgrow the others in different time periods, while Fulton is expected to shrink over the near term and grow modestly over the longer run.
Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Webster's stock has the greatest upside potential and least downside risk, Fulton's stock is believed to have the least upside, while M&T's has the greatest downside risk.
It must be noted, however, that all three stocks are already trading below their low targets on account of the recent market correction. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Webster is best recommended with 3 strong buys and 6 buys combining for a total of 60% of its analysts, followed M&T with 0 strong buy and 9 buy ratings representing 39.13% of its analysts, and lastly by Fulton with 0 strong buy and 1 buy recommendation equaling 7.69% of its analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Webster by an overwhelming lead, outperforming in 17 metrics while underperforming in 3 for a net score of +14. Fulton places second, outperforming in 4 metrics and underperforming in 11 for a net score of -7, while M&T finishes immediately behind, outperforming in 7 metrics while underperforming in 15 for a net score of -8.
Among those in the northeastern corner of America, Webster Financial offers the best trailing revenue and earnings growth, best margins, best earnings per share over current stock price, best earnings growth prospects over 5 years, and highest analyst price targets and recommendations - handily winning the Northeast Regional Banks competition.