Danger Zone 1/14/2013: Fulton Financial
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Fulton Financial (FULT) is in the Danger Zone this week.
This stock is on January’s Most Dangerous Stocks list and gets my Dangerous rating. The outlook for FULT is bleak because it’s bleeding reserves in order to boost earnings.
In the last fiscal year, FULT lowered its credit loss provision by $25 million, which boosts 2011 earnings by 17%. This declining trend continued through 2012. As of the 3rd quarter, Fulton’s credit loss provision shows a further $22.5 million decrease (details in the latest Form 10-Q)
Normally, a decrease in the loss provision indicates that credit conditions are improving, but this isn’t the case with FULT because its actual loan losses (i.e. charge-offs) are rising not falling. Even as it decreased its loss provision by 16% in 2011, its charge-offs increased by 7%.
Through the 3rd quarter of 2012, charge-offs decreased by 19% versus the prior year while the loss provision is down by 26%.
This accounting trick has driven EPS up while actual economic earnings are declining, and investors appear to be falling for it.
The valuation of the stock is up 8% in the last month. The current valuation of the stock ($10.32) implies the company will grow after-tax cash flow (NOPAT) by 7% compounded annually for 31 years.And this from a company that has only averaged 3% growth in NOPAT since 1998. The market is expecting FULT to nearly triple its average growth rate, and then sustain that rate for three decades. Those are some seriously high expectations.
None of the ETF’s or mutual funds we cover allocates more than 2.5% to FULT. I would, however, avoid SPDR S&P Bank ETF (KBE) due to its 2.4% allocation to FULT and its Dangerous rating.
Disclosure: I receive no compensation to write about any specific stock, sector or theme.
Sam McBride contributed to this article.