The less-than-ideal fundamentals of Community Bank System, Inc. (CBU), Xencor, Inc. (XNCR), and Southern First Bancshares, Inc. (SFST) have increased the likelihood of negative surprises during the earnings season and could present opportunities for short sellers to profit from.
Although March’s Producer Price Index (PPI) declined 0.5% from the prior month, registering its largest drop since April 2020, and the Consumer Price Index data has also indicated the cumulative effectiveness of interest-rate hikes by the Federal Reserve, analysts expect profits at S&P 500 companies to have declined 4.8% in the first quarter of 2023 from the year-earlier period.
With the first “earnings recession” since the pandemic seeming ever more likely, fundamentally weak stocks, already subdued by bearish sentiments, could experience significant downward volatility.
In the above context, let us look closely at the featured stocks.
Community Bank System, Inc. (CBU)
CBU is a financial holding company that owns two subsidiaries: Community Bank, N.A. (the Bank or CBNA) and Benefit Plans Administrative Services, Inc. (BPAS). The company operates through three segments: Banking; Employee Benefit Services; and All Other.
On February 1, CBU announced the completion of a balance sheet repositioning related to its investment securities portfolio, wherein the company executed the sale of $786.1 million in book value of its lower-yielding available-for-sale debt securities for an estimated after-tax realized loss of approximately $39.6 million.
The proceeds of $733.8 million from this sale were redeployed towards paying off existing wholesale borrowings. According to CBU, it would take approximately up to 2 years for the losses that have been crystallized as a result of this sale to be recouped.
For the fiscal year that ended December 31, 2022, although CBU’s total interest income increased by 14.5% year-over-year to $443.73 million, primarily due to an increase in the yield on earning assets and a significant increase in average loan balances, it was offset by a 77.6% year-over-year increase in interest expense to $23.10 million.
Similarly, a 5.1% year-over-year increase in CBU’s total non-interest revenue was offset by a 9.3% year-over-year increase in total non-interest expense during the same period. As a result, the company’s net income for the fiscal year declined by 0.9% and 0.6% year-over-year to $188.08 million and $3.46 per share, respectively.
CBU’s Return on Assets (ROA) came in at 1.21% for the fiscal year 2022, compared to 1.28% for the fiscal year 2021.
Ahead of its first-quarter earnings call on April 25, analysts expect CBU’s revenue for the quarter ended March 31, 2023, to decrease 2.6% year-over-year to $155.52 million, while its EPS is expected to decline sequentially by 5.2% to $0.91.
As a result, the stock has slumped 14% over the past month and 25.7% over the past six months to close the last trading session at $47.47, below its 50-day and 200-day moving averages of $55.50 and $61.63, respectively.
Despite the decline, CBU’s forward P/E multiple of 13.07 is 51.4% above the industry average of 8.63. Similarly, its forward Price/Sales and Price/Book multiples of 3.72 and 1.51 also compare unfavorably with the respective industry averages of 2.09 and 0.97. Such stretched valuation indicates further downside risk for the stock.
CBU’s POWR Ratings are consistent with its unenviable outlook. It has an overall rating of D, which translates to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
CBU has an F grade for Value and a D for Sentiment and Quality. CBU is ranked #61 of 66 stocks in the F-rated Northeast Regional Banks category.
Click here to access additional ratings for CBU’s Growth, Stability, and Momentum.
Xencor, Inc. (XNCR)
XNCR is a clinical-stage biopharmaceutical company involved in discovering and developing engineered monoclonal antibodies and cytokine therapeutics to treat patients with cancer and autoimmune diseases with unmet medical needs.
For the fiscal year ended December 31, 2022, XNCR’s revenue declined by 40.2% year-over-year to $164.58 million, while its operating expenses increased by 6.8% year-over-year to $247.05 million. As a result, the company reported a loss from operations of $82.47 million, compared to an income of $43.77 million during the previous fiscal year.
XNCR’s net loss for the fiscal year 2022 came in at $55.18 million or $0.93 per share, compared to a net income of $82.63 million or $1.37 during the fiscal year 2021.
For the fiscal first quarter that ended March 31, 2023, XNCR’s revenue is expected to decline by 68.5% year-over-year to come in at $26.89 million. During the same period, the company is expected to incur a loss of $0.66 per share compared to an EPS of $0.39 during the previous-year quarter.
For the entire fiscal, XNCR’s revenue is expected to decline by 34.2% year-over-year to $108.26 million, while its loss per share is expected to widen by 201.4% year-over-year to $2.80.
The stock has gained 1.4% over the past month but has lost 2.8% over the past six months to close the last trading session at $28.50, below its 50-day and 200-day moving averages of $30.81 and $29.11, respectively.
XNCR’s forward EV/Sales multiple of 10.06 is 181.1% above the industry average of 3.58. Likewise, its forward Price/Sales multiple of 15.80 compares unfavorably with the industry average of 4.21. Such stretched valuation indicates further downside risk for the stock.
XNCR has an overall rating of D which translates to Sell in our POWR Ratings system. It has an F grade for Growth and a D for Momentum. It is ranked #205 of 382 stocks in the F-rated Biotech industry.
Click here for additional ratings for Stability, Value, Sentiment, and Quality of XNCR.
Southern First Bancshares, Inc. (SFST)
SFST primarily serves as the holding company for Southern First Bank. The bank accepts demand deposits and savings deposits insured by the Federal Deposit Insurance Corporation (FDIC) and provides commercial, consumer, and mortgage loans to the general public.
For the fiscal year that ended December 31, 2022, although SFST’s total interest income increased by 26.3% year-over-year to $117.66 million, it was offset by a 268.7% year-over-year increase in total interest expense to $20.04 million, due to the transitional rate cycle of the Federal Reserve.
During the same period, a 44% year-over-year decline in SFST’s total non-interest income was compounded by an 11.5% year-over-year increase in non-interest expense. As a result, the company’s net income available to common shareholders declined by 37.7% and 38.3% year-over-year to $29.12 million and $3.61 per share, respectively.
SFST’s EPS for the fiscal first quarter that ended March 31, 2022, is expected to decline by 34.7% year-over-year to $0.64. For the entire fiscal year, both revenue and EPS are expected to decrease by 1.5% and 20.8% year-over-year to $105.60 million and $2.86, respectively.
SFST’s stock has plummeted 9.5% over the past month and 32.2% over the past six months to close the last trading session at $29.26, below its 50-day and 200-day moving averages of $35.74 and $42.30, respectively.
Despite its bearish price action, the stock is trading at 10.23x its forward earnings and 2.23x its forward sales, which are 18.5% and 6.8% above the respective industry averages of 8.63x and 2.09x. Such stretched valuation indicates further downside risk for the stock.
SFST has an overall D rating, equating to a Sell in our proprietary rating system. It also has a D grade for Growth, Sentiment, and Quality.
SFST is ranked #22 of 28 stocks in the F-rated Southeast Regional Banks category. Click here to see the additional ratings of SFST’s Stability, Value, and Momentum.
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REVISED: 2023 Stock Market Outlook >
CBU shares were trading at $48.85 per share on Wednesday afternoon, up $1.38 (+2.91%). Year-to-date, CBU has declined -21.74%, versus a 8.78% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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