German American Bancorp’s 23.7% return over the past six months has outpaced the S&P 500 by 14.4%, and its stock price has climbed to $48.10 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in German American Bancorp, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is German American Bancorp Not Exciting?
We’re happy investors have made money, but we’re swiping left on German American Bancorp for now. Here are three reasons why GABC doesn’t excite us, plus one stock we’d rather own.
1. Projected Efficiency Ratio Falls Short
The underlying profitability of top-line growth determines the actual bottom-line impact. Banking institutions measure this dynamic using the efficiency ratio, which is calculated by dividing non-interest expenses like personnel, facilities, technology, and marketing by total revenue.
Markets emphasize efficiency ratio trends over static measurements, recognizing that revenue compositions drive different expense bases. Lower efficiency ratios signal superior performance by indicating that banks are controlling costs effectively relative to their income.
For the next 12 months, Wall Street expects German American Bancorp to maintain its trailing one-year ratio with a projection of 51.2%, an unexciting forecast given stock prices follow profits in rational markets.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
German American Bancorp’s EPS grew at a weak 5.3% compounded annual growth rate over the last five years, lower than its 11.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. TBVPS Growth Demonstrates Strong Asset Foundation
We consider tangible book value per share (TBVPS) the most important metric to track for banks. TBVPS represents the real, liquid net worth per share of a bank, excluding intangible assets that have debatable value upon liquidation.
Although German American Bancorp’s TBVPS increased by a meager 1.5% annually over the last five years, the good news is that its growth has recently accelerated as TBVPS grew at a decent 11.6% annual clip over the past two years (from $16.12 to $20.08 per share).
Final Judgment
German American Bancorp isn’t a terrible business, but it doesn’t pass our bar. With its shares topping the market in recent months, the stock trades at 1.4× forward P/B (or $48.10 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re fairly confident there are better investments elsewhere. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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