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Is Zions Bancorp a Good Deal?

- By Alberto Abaterusso

Continuing its trend of quantitative tightening, the Federal Reserve raised the interest rate 25 basis points on Dec. 19. With two potential hikes in 2019, investors are looking favorably at financial services companies as their profits will rise accordingly.

Therefore, I screened the sector in search of stocks that may be good buying opportunities. I came across Zions Bancorp (ZION).


The company has several attractive characteristics:

  • The stock is a component of the S&P 500 index and Nasdaq Financial 100 index.
  • The company has distributed dividends to shareholders since 1984.
  • The forward dividend yield of 2.55% is higher than the S&P 500's dividend yield of 2.01%.
  • The stock has outperformed the S&P 500 index by 6% over the last five years and there isn't any reason why it shouldn't continue to do so in 2019.
  • Consensus is for an average 15% increase in net earnings for the next five years, which is up 400 and 540 basis points from growth estimates for Wells Fargo & Co. (WFC) and JPMorgan Chase & Co.'s (JPM) net earnings over the same span of time.



The Utah-based bank operates in 11 states and its network is composed of 430 branches.

Zions Bancorp has $66.7 billion in total assets and core operations, which have produced $2.79 billion in revenue and $739 million in net income over the last 12 months through the third quarter of 2018. The top line has increased 1.8% on average over the last five years.

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Zions has a net margin of 28.58% versus an industry median of 23.34%, a net loan to total assets ratio of 68.02% and return on assets of 1.18% compared to an industry median of 0.9%.

The net loan to total assets ratio of 68.02% means the bank's net profit is less dependent on asset management and trading activities when compared to the banking majors. This should result in Zions taking more advantage of increased interest rates than its competitors.

Item (in billions of USD), as of Q4 2018

Wells Fargo & Co.

JPMorgan Chase

Citigroup

Bank of America

Loan-to-assets ratio

50.7%

37%

35%

40.3%



The stock is not expensive, and Wall Street is rating it as a buy. Shares of Zions Bancorp were trading around $47.05 at close of Friday for a market capitalization of $9.04 billion. The stock has declined 13% and underperformed the S&P 500 exchange-traded fund by 8% and the Nasdaq ETF by 11% for the 52 weeks through Jan. 18. The closing share price on Friday was 23.6% above the 52-week low of $38.08 and 25.8% below the 52-week high of $59.19.

The stock has a price-book ratio of 1.29 versus an industry median of 1.24 and a price-sales ratio of 3.60 versus an industry median of 3.41. The price-earnings ratio is 13.22 versus an industry median of 14.76 times.

According to the Peter Lynch chart, Zions Bancorp is undervalued.

For the final quarter of 2018, consensus estimates predict net earnings of $1.05 per share on $713.64 million in revenue.

The average target price is $53.26 per share, which is about 12% higher than the market value as of last Friday.

During the third quarter of 2018, George Soros decreased his holding by 21.07% to 276,986 shares.

Disclosure: I have no positions in any securities mentioned in this article.

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This article first appeared on GuruFocus.