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Danger Zone 1/14/2013: Fulton Financial Corp. (FULT)

Monday, January 14th, 2013

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Fulton Financial (FULT) is in the Danger Zone this week.

This stock is on January’s Most Dangerous Stocks list and gets my Dangerous rating. The outlook for FULT is bleak because it’s bleeding reserves in order to boost earnings.

In the last fiscal year, FULT lowered its credit loss provision by $25 million, which boosts 2011 earnings by 17%. This declining trend continued through 2012. As of the 3rd quarter, Fulton’s credit loss provision shows a further $22.5 million decrease (details in the latest Form 10-Q)

Normally, a decrease in the loss provision indicates that credit conditions are improving, but this isn’t the case with FULT because its actual loan losses (i.e. charge-offs) are rising not falling. Even as it decreased its loss provision by 16% in 2011, its charge-offs increased by 7%.

Through the 3rd quarter of 2012, charge-offs decreased by 19% versus the prior year while the loss provision is down by 26%.

This accounting trick has driven EPS up while actual economic earnings are declining, and investors appear to be falling for it.

The valuation of the stock is up 8% in the last month. The current valuation of the stock ($10.32) implies the company will grow after-tax cash flow (NOPAT) by 7% compounded annually for 31 years.And this from a company that has only averaged 3% growth in NOPAT since 1998. The market is expecting FULT to nearly triple its average growth rate, and then sustain that rate for three decades. Those are some seriously high expectations.

None of the ETF’s or mutual funds we cover allocates more than 2.5% to FULT. I would, however, avoid SPDR S&P Bank ETF (KBE) due to its 2.4% allocation to FULT and its Dangerous rating.

Disclosure: I receive no compensation to write about any specific stock, sector or theme.

Sam McBride contributed to this article.

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  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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