Unity Bancorp Inc (NASDAQ:UNTY), a US$232m small-cap, is a bank operating in an industry, which has recently been facing serious existential threats resulting from potential disintermediation and disruption from new technology. Financial services analysts are forecasting for the entire industry, an extremely robust growth of 40% in the upcoming year , and a massive growth of 56% over the next couple of years. However this rate still came in below the growth rate of the US stock market as a whole. Today, I will analyse the industry outlook, and also determine whether Unity Bancorp is a laggard or leader relative to its financial sector peers.
What’s the catalyst for Unity Bancorp’s sector growth?
The threat of disintermediation in the payments industry is both real and imminent, taking profits away from traditional incumbent financial institutions. Over the past year, the industry saw growth in the teens, though still underperforming the wider US stock market. Unity Bancorp leads the pack with its impressive earnings growth of 32% over the past year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be 36% compared to the wider banking sector growth hovering in the thirties next year. As a future industry laggard in growth, Unity Bancorp may be a cheaper stock relative to its peers.
Is Unity Bancorp and the sector relatively cheap?
Banking companies are typically trading at a PE of 17.83x, relatively similar to the rest of the US stock market PE of 20.13x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 8.1% compared to the market’s 10%, potentially indicative of past headwinds. On the stock-level, Unity Bancorp is trading at a PE ratio of 13.55x, which is relatively in-line with the average banking stock. In terms of returns, Unity Bancorp generated 13% in the past year, which is 5.0% over the banking sector.
If Unity Bancorp has been on your watchlist for a while, now may not be the best time to enter into the stock. The company is a banking industry laggard in terms of its future growth outlook, and is trading relatively in-line with its peers. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the financial sector. However, before you make a decision on the stock, I suggest you look at Unity Bancorp’s fundamentals in order to build a holistic investment thesis.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Historical Track Record: What has UNTY’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Unity Bancorp? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.