TFS Financial has had an impressive run over the past six months as its shares have beaten the S&P 500 by 8.4%. The stock now trades at $15.08, marking a 12.4% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy TFS Financial, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think TFS Financial Will Underperform?
Despite the momentum, we're swiping left on TFS Financial for now. Here are three reasons why TFSL doesn't excite us and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
Our experience and research show the market cares primarily about a bank’s net interest income growth as one-time fees are considered a lower-quality and non-recurring revenue source.
TFS Financial’s net interest income has grown at a 3.9% annualized rate over the last five years, much worse than the broader banking industry. This was driven by its loan growth as its net interest margin, which represents how much a bank earns in relation to its outstanding loan book, declined throughout that period.
2. Low Net Interest Margin Reveals Weak Loan Book Profitability
Net interest margin (NIM) serves as a critical gauge of a bank's fundamental profitability by showing the spread between interest income and interest expenses. It's essential for understanding whether a firm can sustainably generate returns from its lending operations.
Over the past two years, we can see that TFS Financial’s net interest margin averaged a poor 1.7%, indicating the company has weak loan book economics.
3. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
TFS Financial’s weak 2% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
Final Judgment
TFS Financial falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 2.2× forward P/B (or $15.08 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.
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