Over the last six months, Simmons First National’s shares have sunk to $18.20, producing a disappointing 17.8% loss - a stark contrast to the S&P 500’s 1.9% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Simmons First National, 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 Simmons First National Will Underperform?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why we avoid SFNC and a stock we'd rather own.
1. Net Interest Income Hits a Plateau
While banks generate revenue from multiple sources, investors view net interest income as the cornerstone - its predictable, recurring characteristics stand in sharp contrast to the volatility of non-interest income.
Simmons First National’s net interest income was flat over the last four years, much worse than the broader bank industry.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Simmons First National, its EPS declined by 13.9% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. High Interest Expenses Increase Risk
Leverage is core to the bank’s business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.
Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.
This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.
New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.
Over the last two years, Simmons First National has averaged a Tier 1 capital ratio of 12.1%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.
Final Judgment
We cheer for all companies supporting the economy, but in the case of Simmons First National, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 0.6× forward P/B (or $18.20 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
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