German American Bancorp (GABC) is a current selection of GuruFocus’ Buffett-Munger Screener. The Buffett-Munger Screener can be used to find companies with high quality business at undervalued or fair-valued prices:
- Companies that have a high Predictability Rank. That is, companies that can consistently grow revenue and earnings.
- Companies that have competitive advantages. It can maintain or even expand its profit margin while growing its business.
- Companies that incur little debt while growing business.
- Companies that are fair valued or under-valued. We use PEPG as indicator. PEPG is the P/E ratio divided by the average growth rate of EBITDA over the past 5 years.
German American Bankcorp has a 5-star Predictability Rank. Back-testing performance results of 5-star rated companies show an average gain of 12.1% per year. Only 3% of 5-star rated stocks are still in loss if held for 10 years. Click Here to read more about GuruFocus’ Predictability Rank.
Over the past decade, GABC shares have outperformed the S&P 500 while demonstrating lower volatility levels, especially during periods of recession.
History
GABC is a southern Indiana financial services provider, specializing in banking, insurance, and investments for business and retail customers. In 1910, GABC was founded in the heart of a large Midwest region of communities rich in German American heritage. Now headquartered in Jasper, Indiana, German American has grown to 37 offices in 13 counties with ~525 employees.
The company has outlined its 100-year history in This presentation.
The bank has also received a host of industry accolades including:
- Raymond James 2013 Community Bankers Cup Recipient
- KBW / Stifel 2010 – 2013 Bank Honor Roll Recipient
- Sandler O’Neill 2012 and 2013 Small-Cap Bank All-Star
- Merion Capital Group – Most Successful Publicly Traded Banks (#1 in the Midwest & #11 in the US)
Comments: The bank has a long history of operating a relationship-based banking business, with deep ties and customer loyalty in the communities it serves.
German American Bancorp business
German American Bancorp is a $2b holding company. It serves individuals, organizations, and businesses in 12 counties in southern Indiana with financial products and services in banking, property and casualty insurance, trust and investments.
According to its latest Loan Composition webpage, its loan-book is dominated by Real Estate and Commerical Loans serving the Indiana area.
Competition
When looking at market share statistics, it’s important to note that GABC doesn’t intend to compete directly against multi-national bank behemoths. Their business is explicitly more focused on relationship-based transactions. For instance, when looking on a statewide level, it doesn’t appear that GABC has any obvious advantages:
When you look at the individual markets that the bank serves, however, it's clear that they focused on becoming a local bank with deep penetration in a couple key markets:
This has allowed GABC to earn outsized returns when compared to their peers. The company has achieved double-digit ROE for the past 9 consecutive years (13%+ ROE in 2012 and 2013).
You can review the rest of their market shares at their website here.
Financial outlook
Management expects the future to pretty much be business as usual. The bank already has a proven executive management team with a track record of consistent financial performance and experience in M&A transactions in their regional markets. They still believe the company has plenty of growth opportunities within new market areas.
Yahoo! (YHOO, Financial) Finance estimates that GABC should achieve 9% annual EPS growth over the next five years. While this lags the industry and overall sector, GABC has shown significantly less volatility in earnings. For example, despite a small uptick, GABC’s loan-book remained incredibly reliable throughout the financial crisis. When looking at non-performing assets and net charge-offs (measures of loan-book health), GABC handily beat its peer group in times of economic financial stress.
Risks (10-K, 2014)
The risks outlined in the company’s 10K are similar to what you see for other financial service firms. The primary risks seem to be regulation, capital requirements and interest rate fluctuations.
- “We operate in a highly regulated environment and changes in laws and regulations to which we are subject may adversely affect our results of operations.”
- “The Dodd-Frank Act and regulations adopted under that law could materially and adversely affect us by increasing compliance costs and heightening our risk of noncompliance with applicable regulations.”
- “The new Basel III Capital Rules may have an adverse effect on us.”
- “Our FDIC insurance premiums may increase, and special assessments could be made, which might negatively impact our results of operations.”
- “Economic weakness in our geographic markets could negatively affect us.”
Management
ISS Governance QuickScore: A score of 1 indicates lower governance risk and 10 indicates higher governance risk. Overall, GABC currently ranks as a 8. The individual component scores are: Audit 2; Board 8; Shareholder Rights 8; Compensation 6.
Ownership
Gurus:
Institutions: Peter Lynch prefers to buy companies with low institutional ownership. At only 21%, GABC would qualify.
Short Interest:
Insiders:
While it has fluctuated, overal insider ownership remains near 10%, aligning managements incentives to shareholders.
Encouragingly, GABC has seen an overwhelming amount of insider buys over recent years in comparison to selling activity.
Valuation
Yahoo! Finance estimates that GABC should achieve 9% annual EPS growth over the next five years.
This estimate would be conservative when looking at GABC’s long-term track record of EPS growth.
Using GuruFocus’ DCF tool and Yahoo! Finance’s consensus growth rate estimates, GABC looks to be roughly fairly valued.
With a higher expected growth rate than the market (9.00% vs. 7.65% annually) and a dramatically lower valuation (13.5x P/E vs. 19.0x), GABC looks to be a much more attractive investment than the S&P 500 overall.
For more ideas like this one, see GuruFocus’ Buffett-Munger Screener.
