Over the past six months, Westamerica Bancorporation has been a great trade, beating the S&P 500 by 7.7%. Its stock price has climbed to $54.55, representing a healthy 12.7% increase. This run-up might have investors contemplating their next move.
Is now the time to buy Westamerica Bancorporation, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Westamerica Bancorporation Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why WABC doesn't excite us and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
Net interest income commands greater market attention due to its reliability and consistency, whereas one-time fees are often seen as lower-quality revenue that lacks the same dependable characteristics.
Westamerica Bancorporation’s net interest income has grown at a 5.2% annualized rate over the last five years, much worse than the broader banking industry.
2. Net Interest Margin Dropping
Net interest margin (NIM) represents the unit economics of a bank by measuring the profitability of its interest-bearing assets relative to its interest-bearing liabilities. It's a fundamental metric that investors use to assess lending premiums and returns.
Over the past two years, Westamerica Bancorporation’s net interest margin averaged 3.9%. However, its margin contracted by 56.9 basis points (100 basis points = 1 percentage point) over that period.
This decline was a headwind for its net interest income. While prevailing rates are a major determinant of net interest margin changes over time, the decline could mean Westamerica Bancorporation either faced competition for loans and deposits or experienced a negative mix shift in its balance sheet composition.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Westamerica Bancorporation’s EPS grew at 8.8% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 3.8% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
We cheer for all companies supporting the economy, but in the case of Westamerica Bancorporation, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 1.4× forward P/B (or $54.55 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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