Sandy Spring Bancorp: Better Late Than Never

Summary

• The financial sector has enjoyed large gains over the last 18 months.
• Sandy Spring Bancorp has had the same experience as its peers.
• The company's valuation is very attractive.

Since President Donald Trump's election in November 2016, banking stocks have been a favorite of many. There are several macro factors contributing to this bullishness (rising interest rates, tax cuts, deregulation, etc.) which have been covered extensively on Seeking Alpha as well as in other investing communities; I will spare you from the redundancy. Whenever an industry experiences that much optimism over an extended period of time, valuations start to become frothy. While I still am bullish on the sector's prospects, some prudence and bargain hunting are required in order to maximize returns. Interestingly enough, this perspective tends to lead me away from larger national players and towards regional banks. The bullish outlook for the sector as a whole has lifted the majority of financial stocks, but there have been some a little left behind. Sandy Spring Bancorp (NASDAQ:SASR) exemplifies this, as the company's stock didn't experience outsized gains in 2017 like many of its competitors.

SASR data by YCharts

SASR was "left behind" in a sense, but its valuation is quite appealing at current levels, especially given the industry average. On January 1, 2018, the company completed its acquisition of WashingtonFirst Bankshares, giving it more scale in the Mid-Atlantic United States.

Will 2018 Be The Year SASR Plays Catch-Up?

Sandy Spring's underperformance is something of an anomaly to me given the bank's operating performance over the course of the year. Below is a series of images that shows various metrics reflecting the performance of SASR. In addition to year-over-year change, a column showing the five-year CAGR for each metric was included for more historical context. Figures supporting these tables were found on Sandy Spring's Corporate Profile on SNL.com.

I find each of the figures above to be impressive and generally superior to what you'd get with most big national banks. The most notable aspect, in my opinion, would be that both columns tell a positive story and validate that 2017 wasn't a one-off year.

Not much guidance for next year has been publicly disclosed by the company yet. On Sandy's Spring's Q4 2017 Earnings Conference Call, executives expressed the desire to integrate WashingtonFirst more before providing analysts with too many forward-looking statements. However, during the Q&A of that call, CEO Daniel Schrider estimates that organic loan growth will be between 8% and 10% in addition to the loan portfolio of WashingtonFirst.

The profitability ratios above are encouraging and the variance between the two columns is understandable. The operating environment for banks has been significantly more attractive recently from a financial perspective as interest rates have increased over the last year and a half or so. Another positive note on the bank's net income is that it has been gradually increasing since 2014 before its growth acceleration in 2017.

Book value per share is an important metric for financial institutions and usually moves in tandem with stock price. This hasn't been the case which can point towards a stock being undervalued. The consistent increase in book value per share and tangible book value per share over the past five years should give investors confidence in the stability of this company. The same point could be made for the consistent increase in dividends. Especially since the capital return plans of banks are put under intense scrutiny during the CCAR process, a 10% five-year CAGR for dividends per share indicates that the bank's capital position is strong. Net interest margin growth is the least spectacular of all these metrics. The 0% five-year CAGR is understandable given the elongated period of low rates our economy just emerged from. The year-over-year change is underwhelming as well, but this is expected to increase over the next few years.

Valuation

It's clear from the passage above that I am bullish on the potential for continued growth at SASR, but that's not that rare in today's banking sector. The thing I like most about this stock is its valuation. The table below shows projected EPS for the next three years as well as the corresponding price to earnings ratio using $38.75/share as the basis of calculation:

Year	EPS	P/E
FY18E	$ 2.90	13.36
FY19E	$ 3.42	11.33
FY20E	$ 3.55	10.92

Click to enlarge

Earnings estimates provided by The Wall Street Journal

In today's market, it's very difficult to find a company trading at such low P/E multiples, especially in the most attention-grabbing industry of late. The valuation almost seems too low, but the effect of the recent market correction must be acknowledged as well as the fact that these estimates have been increased in the last quarter. According to WSJ, three months ago, the EPS estimates above were considerably lower. Consensus estimates for FY18 stood at $2.61, and FY19 estimates were $3.10. Often times estimate revisions can go under the radar, especially when the company in question is rather small and there are other distractions in the marketplace. Over the last few months, investors have been preoccupied with FY17 earnings reports, the Tax Cuts and Jobs Act and its subsequent impacts, and then the recent bout of volatility. Large macro events like that can create opportunity, although sometimes only temporary.

Conclusion

Despite the overall climb in share price across the financial sector, Sandy Spring Bancorp's stock has flatlined. After years of increasingly strong performance, I believe 2018 will be the year SASR begins to trade more in line with its peers. In addition to the stock appreciation, I expect the bank currently has a yield of 2.7%, which serves a nice bonus for investors. Bottom line: Sandy Spring is undervalued and is a buy at current levels.

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