Westamerica Slogging Through

Westamerica Bancorporation’s (WABC - Analyst Report) 2Q08 diluted operating earnings of $0.77 per share were in-line with estimates. Results were supported by a 37 bps sequential increase in net interest margin and unchanged provision for loan losses. On the downside, credit quality worsened during the quarter and growth continued to be elusive.

After reviewing the results, we are slightly moderating our FY08 and FY09 estimates to $3.10 per share and $3.25 per share, respectively. Currently, WABC trades at 17.2 times the consensus forward estimate, a 21% premium to the peer group median. On a price-to-book basis, the shares now trade at 283% premium to the peer median, versus 355% premium as on May 28, 2008.

Relative pricing continues to look very expensive on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate. WABC’s PEG ratio is now 2.69, a 119% premium to the 1.23 median for the peer. On a price-to-book basis as well, the 283% premium looks quite stretched, given a ROE only 32% above median.

However, we believe that WABC should continue to trade at a sizeable premium to its peers, given its strong capital levels and superior credit metrics. These positives mainly result from its minimal exposure to housing loans, though we anticipate some moderation in the credit quality in the coming quarters mainly due to the commercial real estate portfolio of the bank.

We also see payback problems spreading from mortgages to other types of loans. Further, we still think that the company could be a reasonable acquisition target, which should continue to lend support to the shares.

Our $56.00 price target equates to about 3.83 times our projected book value six months out or about 18.1 times our 2008 earnings estimate of $3.10 per share. Along with $1.40 per share annual dividend, the target price implies a return of about 6.5% over the six-month horizon. Thus, we reiterate our Hold rating on the shares of WABC.

Kalyan Nandy contributed to the report.

Read the full analyst report on WABC