Market Keeps Westamerica a Hold
Westamerica Bancorporation's (WABC) fourth quarter '07 diluted operating earnings of $0.76 per share (excluding the expense for Visa litigation and a onetime income tax refund) were in-line with our estimate but a penny ahead of consensus. Credit quality remained stable but growth continued to be elusive. After reviewing the results, we are slightly moderating our EPS estimates and six-month target price, mainly due to current negative sentiments for the financial services sector as a whole.
We think that the shares should continue to trade at a premium, based on WABC's superior capital levels, operating performance and credit quality compared to its peers, not to mention its potential as an acquisition target. Relative pricing continues to look very expensive on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate.
WABC's PEG ratio is now 2.67, a 167% premium to the 1.0 median for the peer group (versus a 262% premium previously). On a price-to-book basis as well, the 249% premium looks somewhat stretched given an ROE 75% above median (the ROE adjusted P/B is 63% above median).
However, we believe that WABC should continue to trade at a sizeable premium to its peers given its strong capital levels and superior credit metrics (mainly resulting from its minimal exposure to housing loans, though we cannot rule out some moderation in the credit quality in the coming quarters, as we currently see the payback problems spreading from mortgages to other types of loans). Further, we still think that the company could be a reasonable acquisition target, which should continue to lend support to the shares.
We, therefore, maintain our Hold recommendation on the shares. Our $48 price target equates to about 3.5 times our projected book value six months out (now June 2008) or about 15.7 times our 2008 EPS estimate of $3.05 per share.
Big Upside for WellPoint
WellPoint, Inc. (WLP) is the largest publicly traded commercial health benefits company, and the largest of the Blue Cross Blue Shield (BCBS) plan providers, in terms of membership in the US. On March 10, 2008, WLP revised previous FY08 guidance based on higher than expected medical costs and lower than expected fully insured enrollment during the first two months of 2008.
The company attributed the lower-than-expected fully insured numbers on current economic conditions. Management now expects FY08 EPS of between $5.76 and $6.01 (previously $6.41), and 1Q08 EPS of between $1.16 and $1.26 (previously $1.44). We have adjusted our forecasts accordingly and maintain a Buy rating at current levels.
We have valued WLP on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the managed care sector.
