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Can FISI, BKYF Sustain Recent Earnings Spurt?

Jan. 26, 2014 5:19 PM ETFISI, BKYF
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Long/Short Equity, Portfolio Strategy

Seeking Alpha Analyst Since 2012

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Financial stocks, especially regional and small banks, are in limelight with a string of vastly improved results by a number of companies. Financial Institutions Inc. (NASDAQ: FISI) and The Bank of Kentucky Financial Corp (NASDAQ: BKYF) were among the stocks that benefitted from this trend following fantastic quarterly earnings. The big question is if these stocks can continue to outperform wider markets and going by the Federal Reserve's decision to taper its asset buying program, the ground looks ready for a rally in 2014. Here is a closer look.

New York based Financial Institutions Inc. is the holding company for Five Star Bank, which offers an array of banking services to retail, commercial, and municipal customers in Western and Central New York. In the most recent quarter ended September 30, 2013, the company's net income jumped 48.8 percent to $5.8 million although its interest income dropped slightly during the period. With retail interest rates set to go up, the company is likely to see more of this phenomenon. The company is valued 12.5 times its forward earnings and offers a dividend yield of 3.1 percent. This is despite advancing more than 20 percent in the last quarter on the bourses. A price by book value ratio of 1.47 also indicates it remains undervalued. Among other positives, the company is a debt free entity which allows it to rake in net margin of 24 percent; slightly more than the segment average. As such, it is one of the attractive options if the industry goes into consolidation phase.

Similarly, The Bank of Kentucky Financial Corp has seen a steady upward trend with quarterly gains in excess of 30 percent. The stock has created new 52-week high and currently trades very close to this level. In the third quarter, the company's net earnings moved up 29 percent to $5.4 million on the back of policy tailwinds. These tailwinds are expected to keep pushing earnings as banks' interest costs remain same, but retail interest rates go up. With regards to valuations, the stock is reasonably priced at a price earnings ratio of 14.7, while dividend yield of 1.8 percent is not too bad although this should not be the primary reason to buy this stock. The Bank of Kentucky has a solid 31.4 percent net margin and despite a market cap of $277 million, has low institutional ownership. This indicates there is room to grow.

Being regional banks, there are limits to growth these companies can manage; however, these should be bought for the quality of earnings and their solid balance sheets.

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