TowneBank (TOWN) Could Be 14% Below Fair Value After Its Blueharbor Deal

TowneBank (TOWN) has agreed to buy blueharbor bank in a cash and stock deal valued at about US$154 million, a move that extends its reach in the Charlotte market.

The TowneBank share price has slipped over the past month, with a 30 day share price return of down 7%, even as the year to date share price return is up 5.3% and the 3 year total shareholder return sits at 71.42%. This suggests that longer term holders have seen much stronger momentum than recent traders.

Scan how TowneBank’s blueharbor move compares with other regional financial institutions by running through our hand picked list of solid balance sheet and fundamentals (25 results).

TowneBank is paying up for blueharbor while the share price has eased back, which raises a simple tension. Is this deal highlighting business strength or simply arriving as sentiment cools, and how does that feed into valuation?

Preferred P/E of 10x for TowneBank: Is it justified?

TowneBank trades on a P/E of 10x while sitting at a last close of $34.98, which puts the stock at a level that screens as good value against both its own fair ratio and its peer set.

The P/E multiple compares the current share price to earnings per share and, for a bank like TowneBank, it gives you a shorthand view of how much investors are paying for each dollar of profit. For lenders and other financial institutions, earnings tend to be a key anchor for valuation because balance sheets are tightly regulated and revenue can move with interest rate cycles.

In this case, analysts assessing TowneBank judge 10x earnings to be attractive when stacked against an estimated fair P/E of 10.3x. On top of that, the same 10x P/E is described as good value when lined up against both a 15.6x peer average and the broader US Banks industry at 11.5x. This signals that the market is pricing TowneBank more conservatively than many comparable regional players and leaves room for the multiple to move closer to that fair level if the story holds together.

Explore the SWS fair ratio for TowneBank.

Result: Price-to-earnings of 10x (UNDERVALUED)

Still, TowneBank’s revenue decline of 2.11% and flat net income growth suggest limited earnings momentum that could cap how far any valuation re-rating runs.

Find out about the key risks to this TowneBank narrative.

Another View On TowneBank’s Value

The first lens on TowneBank focused on its P/E, which screens as inexpensive. A second approach, our DCF model, also points to value, with an estimated future cash flow value of $39.96 versus a share price of $34.98. That gap implies upside, but how comfortable are you with the assumptions sitting inside that cash flow curve?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out TowneBank for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 29 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Mixed about how TowneBank stacks up after this deal and the current valuation work? Take a few minutes to review the numbers yourself, weigh both the concerns and the potential upsides, and then dig into the 4 key rewards and 1 important warning sign.

Looking for more TowneBank sized investment ideas?

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• Target resilient cash generators that combine attractive pricing with robust fundamentals through the 29 high quality undervalued stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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