3 Reasons FIBK is Risky and 1 Stock to Buy Instead
First Interstate BancSystem currently trades at $32.57 per share and has shown little upside over the past six months, posting a small loss of 4.3%. The stock also fell short of the S&P 500’s 13.1% gain during that period.
Is now the time to buy First Interstate BancSystem, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think First Interstate BancSystem Will Underperform?
We’re cautious about First Interstate BancSystem. Here are three reasons we avoid FIBK, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
In general, banks make money from two primary sources. The first is net interest income, which is interest earned on loans, mortgages, and investments in securities minus interest paid out on deposits. The second source is non-interest income, which can come from bank account, credit card, wealth management, investment banking, and trading fees.
Regrettably, First Interstate BancSystem’s revenue grew at a mediocre 9.1% compounded annual growth rate over the last five years. This was below our standard for the banking sector.
2. Efficiency Ratio Expected to Falter
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 understand that a bank’s expense base depends on its revenue mix and what mostly drives share price performance is the change in this ratio, rather than its absolute value. It’s somewhat counterintuitive, but a lower efficiency ratio is better.
For the next 12 months, Wall Street expects First Interstate BancSystem to become less profitable as it anticipates an efficiency ratio of 64.1% compared to 57.6% over the past year.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
First Interstate BancSystem’s EPS grew at a weak 1.3% compounded annual growth rate over the last five years, lower than its 9.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We cheer for all companies supporting the economy, but in the case of First Interstate BancSystem, we’ll be cheering from the sidelines. With its shares underperforming the market lately, the stock trades at 1.1× forward P/B (or $32.57 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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