Over the past six months, Washington Trust Bancorp has been a great trade, beating the S&P 500 by 5.6%. Its stock price has climbed to $34.95, representing a healthy 14.5% increase. This run-up might have investors contemplating their next move.
Is now the time to buy Washington Trust Bancorp, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Washington Trust Bancorp Will Underperform?
We’re glad investors have benefited from the price increase, but we’re swiping left on Washington Trust Bancorp for now. Here are three reasons why WASH doesn’t excite us, plus one stock we’d rather own.
1. Net Interest Income Points to Soft Demand
Our experience and research show the market cares primarily about a bank’s net interest income growth as one-time fees are considered a lower-quality and non-recurring revenue source.
Washington Trust Bancorp’s net interest income has grown at a 4.3% annualized rate over the last five years, much worse than the broader banking industry. Its growth was driven by an increase in its net interest margin, which represents how much a bank earns in relation to its outstanding loans, as its loan book was flat throughout that period.
2. Low Net Interest Margin Reveals Weak Loan Book Profitability
Net interest margin (NIM) serves as a critical gauge of a bank’s fundamental profitability by showing the spread between interest income and interest expenses. It’s essential for understanding whether a firm can sustainably generate returns from its lending operations.
Over the past two years, we can see that Washington Trust Bancorp’s net interest margin averaged a poor 2.3%, meaning it must compensate for lower profitability through increased loan originations.
3. EPS Trending Down
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.
Sadly for Washington Trust Bancorp, its EPS declined by 9.6% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
Final Judgment
We see the value of companies driving economic growth, but in the case of Washington Trust Bancorp, we’re out. With its shares topping the market in recent months, the stock trades at 1.2× forward P/B (or $34.95 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of Washington Trust Bancorp
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