A Trip to the Ozarks

 | Apr 25, 2013 | 11:00 AM EDT
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Since mid-April, several insiders have bought shares of Bank of the Ozarks (OZRK), a $1.5 billion market cap regional bank with a majority of branch locations in Arkansas, at prices between $40 and $41 per share. Some of these purchases were less than $50,000 apiece, and one larger buy was by a new board member who could be adding the shares simply as a courtesy. But considering these purchases together, the trend is noteworthy.

We track insider purchases because stocks bought by insiders tend to exhibit a small outperformance effect, which increases if the focus is narrowed to occasions when multiple insiders are buying within a short period. This is because insiders avoid buying the stock (thus increasing their company-specific risk) unless they are confident in its prospects, otherwise they prefer to diversify their holdings.

In the first quarter of 2013, Bank of the Ozarks increased revenue by 6% compared with a year earlier, with growth driven by a rise in non-interest income. With non-interest expenses rising more slowly, net income came in 11% higher. Some of these increases were due to the acquisition regional bank Genala Banc of Alabama in the final quarter of 2012, and so it should not be taken as an indicator of sustainable earnings growth. Book value per share increased by 16%, though the bank still trades well above the book value of its equity.

In terms of earnings, the bank looks like something of a better value, though still dependent on improved performance. Specifically, Bank of the Ozarks currently trades at 18x trailing earnings. That multiple will fall a small amount as the company records more quarters with its new acquisition, but that's certainly not a strong enough factor to bring the bank into value territory. Wall Street analyst consensus is that Bank of the Ozarks will earn $2.39 per share this year, and then $2.62 per share in 2014 (that figure implies a forward price-to-earnings ratio of 16). Those valuations don't seem that attractive, assuming that a substantial share of last quarter's numbers came off an acquisition (the megabanks currently trade at 10x forward earnings estimates or lower). The most recent data shows that 13% of the float is held short, so these insiders are going against a good number of market players.

IberiaBank (IBKC) is a similarly sized bank by market capitalization operating in the Gulf Coast region and Arkansas. Its earnings multiples look similar to those of Bank of the Ozarks, with trailing and forward P/Es of 19 and 13, respectively, so we can conclude that the market is at least treating Bank of the Ozarks similarly to its peer. Note that the sell-side is calling for higher earnings growth at IberiaBank, and we can see that in the fourth quarter of 2012 that company's revenue and earnings did grow fairly strongly compared with the fourth quarter of 2011.

Regional banks are a potentially interesting industry given the potential for consolidation (which, in addition to higher margins, might lead to smaller players getting bought out). Bank of the Ozarks has been getting attention from insiders, and that is interesting, but we aren't sure that the stock is cheap enough in terms of trailing earnings to be a good value or that the company can organically grow its earnings that much more than other banks. As a result, larger regional banks such as Regions Financial (RF), or even the megabanks, might be more interesting targets for future research.

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