TowneBank: A Debt-Free Cash Cow On Sale

| About: Towne Bank (TOWN)
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Summary

TowneBank is a highly profitable company.

It trades at a low multiples.

As a debt-free company, it is a cash cow.

TowneBank (NASDAQ:TOWN) is currently offering investors an opportunity to buy portions of the company at about $23/share. The stock has been trending higher for the past six months and has broken out into new highs just in the past two weeks, establishing a new support level at the $23 range. It may now provide a good entry point as it just reported record earnings a few days ago. Right now, TOWN is just above this new support level and provides long-term investors with a good opportunity to initiate a position.

TowneBank has a business model that is simple and sustainable. The company is a regional bank serving the eastern United States that focuses on insurance and real estate, in addition to retail banking. Being a regional bank, it's not subject to as many regulatory hurdles as the larger banks. According to its most recent annual report, revenue actually grew by 23% year-over-year and net income grew 48%! Another main draw of this company to me is its sheer profitability. Its operating margin is 83%, and its profit margin is almost 30%. That's incredible! The company is able to increase its income at a rate that crushes inflation, passing along the devastating effects of inflation on to their customers, not their shareholders.

Despite the growth, I believe the company trades at a discount to its true valuation. TOWN currently trades at 14 times forward earnings and less than three times cash. TOWN appears to be heading in the right direction as a company, and I would be content to accumulate shares at this perceived discount. EPS has grown by 12% annually for the past five years. Even if future EPS remains flat, you're still only paying fourteen times earnings, putting it in the middle of its competitors in the Mid-Atlantic regional banking industry. TOWN is the type of company that I want to own for the long haul, and this appears to be an opportune time to initiate my position.

TowneBank also has a decent yield: You get paid to wait while revenue growth and EPS growth take your investment higher over the years. TOWN has a current yield of 2.25%. Is the dividend sustainable? Absolutely. Its payout ratio is under 40%, giving it ample room to increase its dividend. And increase it, it has. TOWN is a Dividend Challenger, having increased it's dividend annually for the past five years, and is included on the famous 'CCC' list, produced by David Fish. Additionally, TOWN is sitting on $9.21 of cash per share. That's over seventy quarters' worth of dividend payments at the current rate!

Despite the above positive factors, the main attractive quality here is to buy a highly profitable, quality company at fourteen times forward earnings. Even if profits were to stagnate or regress from here, it's still trading at only under three times cash on hand. Additionally, and this point can be overlooked, the company has no debt. That's right, none whatsoever. This is a profitable cash cow of a company with solid free cash flow, high margins, no debt, trading at a low earnings multiple.

As always, this article represents my opinions at the time of writing. You should do your own due diligence before making any investment decisions. However, I believe that TowneBank represents a quality company that is trading hands at a discount. Please provide your feedback in the comments section below and follow me to be notified of any future articles that are published.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TOWN 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.