Is Zions Bancorp a Hard Sell?

With shares of Zions Bancorp (NASDAQ:ZION) trading at around $22.89, is ZION an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Zions recently reported Q4 EPS of $0.19 and revenue of $552.40 million. Profit was down 35 percent year-over-year due to an impairment charge on CDO securities. That statement should give any investor pause. You could make a solid argument that CDOs were the number-one catalyst for the near collapse of the financial system in 2008. Whether you’re a fan of Warren Buffet or not, you have to respect his track record. He has stated that, “CDOs spread risk and uncertainty about value of the underlying assets more widely, rather than reduce risk through diversification.” You can do with this information as you please, but Zions Bancorp has placed riskier bets than the average regional bank, and there is a lack of transparency.

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Getting back to the last quarter, excluding FDIC-supported loans, loans and leases increased by $463 million to $37.1 billion. Compared to Q3, net loan and lease charge-offs declined 51 percent, and nonperforming lending-related assets declined 11 percent. Credit quality and net interest income exceeded expectations, but net interest income might be challenging ahead. Moderate loan growth should offset any pressure on net interest margin. There has been a reduction in problem loans, but there has been a rise in operating expenses. As you can see, wherever there is good news, there is bad news to match it. Looking ahead, Zions Bancorp plans to “execute capital actions to significantly reduce interest expense.” If you read the company’s press release, you will find many statements of this nature where what is being said can be sold, but without detail.  

Despite the negativity thus far, there are several positives. Let’s take a look at some important numbers…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio is normal, and the balance sheet is strong, but will it remain strong?

Debt-To-Equity

Cash

Long-Term Debt

ZION

0.47

$8.56 Billion

$2.33 Billion

BBCN

0.70

$229.64 Million

$502.62 Million

UMPQ

0.34

$547.53 Million

$449.67 Million

 

T = Technicals on the Stock Chart Still Qualify As Strong

Zions Bancorp has been performing well over the past year. It has outperformed BBCN Bancorp (NASDAQ:BBCN) and Umpqua Holdings Corporation (NASDAQ:UMPQ) over the past year. However, Zions Bancorp only yields 0.20 percent whereas BBCN Bancorp yields 1.70 percent, and Umpqua Holdings Corporation yields 2.80 percent.

1 Month

Year-To-Date

1 Year

3 Year

ZION

8.42%

7.06%

35.92%

19.17%

BBCN

6.24%

5.88%

21.20%

1.32%

UMPQ

10.03%

7.97%

6.49%

9.30%

 

At $22.89, Zions Bancorp is currently trading above all its averages.  

50-Day SMA

21.06

100-Day SMA

21.02

200-Day SMA

20.12

 

E = Earnings Have Been Inconsistent

Earnings and revenue have been inconsistent on annual basis.

2007

2008

2009

2010

2011

Revenue ($)in billions

3.62

3.17

3.32

2.76

2.69

Diluted EPS ($)

4.40

-2.68

-9.92

-2.48

0.83

 

We already know what happened this quarter. Now let’s take a look at what happened in previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

675.44

637.78

630.78

641.25

634.23

Diluted EPS ($)

0.35

0.24

0.14

0.30

0.34

 

T = Trends Support the Industry

If you look at the performance of almost any regional bank stock recently, you will see excellent results. Most regional banks have made a return to traditional lending practices while paying off debts. This has allowed investors to sleep at night. The Zions Bancorp situation is a little more complicated, and complication is rarely a friend of investor confidence.

Conclusion

Zions Bancorp has strong margins and an attractive valuation when looking at forward earnings. However, ROE is only 5.91 percent, earnings and revenue growth are poor, operating expenses have increased, and there was an impairment charge. If you like to keep investing as simple as possible, one rule of thumb is to run away as if your tail is on fire whenever you read the words “impairment charge.”

Zions Bancorp is a STAY AWAY.

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