The impact of hurricanes Irma and Maria were sad and devastating for Puerto Rico. There were an estimated $90 billion in damages in addition to many deaths from these storms. Puerto Rico is still in the recovery phase after over a year since these storms occurred.
The rebuilding phase from these storms is expected to lead to a real GNP increase of 7.6% in Puerto Rico during 2019. The banks in Puerto Rico stand to benefit from this recovery. Popular (BPOP) is the bank that I see with the strongest growth potential as a result of higher expected earnings growth (consensus) as compared to their peers.
Popular is expected to grow earnings at 17% in 2019. Competitors, First BanCorp (FBP) and OFG Bancorp (OFG), should also perform well as they are expected to grow earnings at 11.5% and 12.8% next year, respectively, according to consensus estimates. All three of the Puerto Rico-based banks are trading at similar valuation levels. I'm expecting Popular to outperform as they have higher expected earnings growth, which should drive the stock for larger gains.
Numerous catalysts exist that will help drive Popular to achieve their consensus estimates. Lending opportunities are expected to improve in Puerto Rico in 2019. This is a result of the post-hurricane recovery for the economy in Puerto Rico. Popular is seeing large quantities of liquidity in the system, which customers are using for financing expansion and to pay down debt. Further economic growth will help drive higher demand for larger commercial projects, which will increase demand for Popular's lending business.
The company noted in the Q3 conference call that the 25% increase in cement sales during the quarter is a positive sign of a healthy economy. This shows that projects are increasing, which is likely to lead to increased lending demand.
Another positive is that wages and salaries increased 7% in Q3. The increase puts more money into the economy. That can help drive higher demand for residential real estate as consumers earn more money for down payments. That will help drive demand for Popular's residential lending business.
The employment situation is expected to improve in Q4 2018 and Q1 2019. This is a result of large hotels reopening due to the hurricane recovery. This will help improve the employment situation for the hospitality industry. When employees in that industry secure jobs again, demand is likely to increase for Popular's residential loans.
Popular achieved an increase of 55,000 customers since the hurricanes. That doesn't include customers from the Reliable Financial Services acquisition. Popular pointed out that there was a correlation between regions where their competitors closed branches and Popular's increased customer growth. The company also pointed out that some customers may have opened additional accounts to accept government assistance money for the hurricane recovery.
The increase in customers can lead to an increase in new loans and other business as Popular markets their services to them. Popular stated that they are looking to add loans carefully by keeping profitability in mind. This prudent approach can reduce the risk of taking on riskier loans which could lead to less profitability.
Popular's competitive advantage is their customer-service focused approach. The company provided a lot of help to the community after the hurricanes. For example, they established child care centers for employees at their main buildings. Water, food vouchers, and supplies were distributed to employees in need. For customers, Popular waived ATM fees for 25 days after the hurricanes and offered payment moratorium on credit cards, personal loans, auto loans, and mortgages. Popular also offered other assistance on FEMA and insurance claims procedures.
The efforts that Popular did for employees and customers after the hurricanes helps to create a positive bond among employees and customers. That can help to increase business as consumers will be more willing to do business with a bank that shows that it cares about them.
Valuation Allows for Further Price Appreciation
Popular is trading with a forward PE of just 9 based on expected EPS of $5.72 for 2019. Many banks are still trading at bargain prices in this market. I think Popular is a good pick given the low valuation level and the strong potential for growth. Here's how Popular compares with its peers:
|Popular||First BanCorp||OFG Bancorp|
|Price to Book||1.01||1.0||0.95|
Expected EPS Growth
Overall, Popular looks like the most attractive Puerto Rico-based bank as they have the lowest valuation on a forward PE basis and the highest expected earnings growth for 2019. All three companies are trading about on-par in terms of price to book ratio, which I find to be a good valuation metric for banks. The price to book accounts for the book value, which reflects the state of the balance sheet.
Popular does have a strong balance sheet with $5 billion in total cash and $2 billion in total debt. There are 1.1x more total assets than total liabilities for stockholders' equity of $5.2 million. With numerous catalysts in play, I'm expecting Popular to grow book value at least through 2019.
Frankly, I think the stocks of all three banks will perform well through 2019 since they are valued reasonably with double-digit expected earnings growth. The catalysts in play that I mentioned, especially the post-hurricane recovery, will help drive earnings growth for these banks.
Outlook for Popular
While the post-hurricane recovery in Puerto Rico presents various growth catalysts for Popular, the sustainability of the economic situation there is less certain. I view Puerto Rico's economy as the biggest risk for Popular. I expect the catalysts to last through 2019, but we'll have to keep a close eye on Puerto Rico's economy since that can affect customers' ability to pay back and take on new loans.
With multiple growth catalysts currently in play for 2019, I'm giving the stock a one-year price target of $60-$62 for a gain of about 15% to 19%. I expect the stock to be driven by the expected earnings growth of 17% for 2019. The upper range of my price target could be hit because there is room for PE expansion due to the low valuation.
The price target range would take the forward PE up to 10.5 to 10.8 based on expected EPS of $5.72 for 2019. That looks reasonable for a company with strong earnings growth, while still allowing for a below-average PE ratio due to long-term uncertainties for the economy in Puerto Rico.
Let me know your thoughts on Popular in the comment section below.
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Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). I am not a registered investment advisor. Investors should do their own research or consult a financial advisor to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.