By: Philip Suess, AIM student at Marquette
University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
•
Bank of the Ozarks, Inc. (NASDAQ:OZRK)
provides regional banking services in the Southeast Portion of the country with
over 250 branch location spanning across ten states.
•
OZRK is well positioned to benefit from the upcoming rate hikes as 79% of their
originated loans have variable interest rates.
•
While the banking industry is very competitive, OZRK’s 38% efficiency ratio
makes it one of the most efficient banks in the country and justifies a premium
for the stock.
•
The implementation of tax reform in the United States should help prolong the
current bull market and drive strong deposit and loan growth for the year.
•
OZRK should be returning to their 52 week high as the stock stands to benefit
from favorable macroeconomic conditions and their large concentration of variable
interest rate loans.
Key points: Economic conditions are very favorable to regional
banks and Bank of the Ozarks is expected to continue to be a leader in this
industry. In 2018, the bank was awarded Top Performing Regional Bank with
assets between $5 billion and $50 billion by S&P Global Market
Intelligence. This marked the eighth consecutive year in which Bank of the
Ozarks has been awarded as a Top Performing Bank. Consistently being recognized
as an industry leader is a strong testament to the ability of CEO George
Gleason, who owns 4.5% of outstanding shares and has been with the company
since 1979.
Currently,
Bank of the Ozarks has 79% of their loan portfolio tied to variable interest
rates which stands to be a major driver of profitability. The Federal Reserve
has increased the Fed Funds Rate once this year with two more rate hikes
expected for 2018 and three more rate hikes expected next year, Bank of the
Ozarks should experience a steep increase in the yield on their outstanding
loan portfolio.
Additionally,
management signaled in their most recent earnings call that they expect their
efficiency ratio to improve to under 35% during the year. This improvement in
efficiency signals that the bank expects to experience increasing margins in
2018 leading to higher profitability. An increase in loan and deposit growth
resulting from the new tax policy paired with improving margins puts Bank of
the Ozarks on track to continue to be a top performing regional bank.
What has the stock done
lately?
Year
to date, Bank of the Ozark’s stock has fallen by ~3.8% after falling significantly
in March. During April, the stock has been fluctuating between $48.50 and
$46.00. Recently, the price is beginning to trend upward again following an
earning call in early April. Despite recent volatility in the stock, Bank of
the Ozarks is expected to return to their 52 week high as a result of future
rate hikes and the continuation of strong economic conditions.
Past Year Performance: During January 2017, the stock reached an
all-time high before falling sharply in March. Over the past year, the stock is
down ~2.1%. While the stock has not moved significantly this year, Bank of the
Ozark’s valuation multiples have decreased considerably implying the stock is
trading at discount to its historic valuation. These multiples are expected to
return to previous levels driving a higher valuation.
1 Year Stock Chart vs. Russell
2000
My Takeaway
Bank
of the Ozarks is a strong play moving forward and should begin to see a higher
valuation in the latter half of 2018. The stock is expected to experience
higher growth from tax reform and strong national economic conditions.
Additionally, their loan portfolio is poised to benefit from a series of rate
hikes leading to higher profitability. These factors should lead to the return
of historical valuation multiple and a higher stock price. Looking ahead, Bank
of the Ozarks should begin trending toward its all-time high from 2017 sooner
rather than later.
1 Month Stock Chart
