Webster Financial has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 8.3% to $79.06 per share while the index has gained 11%.
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Why Is Webster Financial Not Exciting?
We’re passing on Webster Financial for now. Here are three reasons why there are better opportunities than WBS, plus one stock we’d rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within financials, a stretched historical view may miss recent interest rate changes and market returns. Webster Financial’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 5.2% over the last two years was well below its five-year trend. 
Note: Quarters not shown were determined to be outliers because they were impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.
2. Efficiency Ratio Expected to Falter
The underlying profitability of top-line growth determines the actual bottom-line impact. Banking institutions measure this dynamic using the efficiency ratio, which is calculated by dividing non-interest expenses like personnel, facilities, technology, and marketing by total revenue.
Markets understand that a bank’s expense base depends on its revenue mix and what mostly drives share price performance is the change in this ratio, rather than its absolute value. It’s somewhat counterintuitive, but a lower efficiency ratio is better.
For the next 12 months, Wall Street expects Webster Financial to become less profitable as it anticipates an efficiency ratio of 47.9% compared to 46.8% over the past year.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Webster Financial’s EPS grew at an unimpressive 8.4% compounded annual growth rate over the last five years, lower than its 20% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Webster Financial isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 1.3× forward P/B (or $79.06 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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