Hot Stock Commentary: MidWest One Financial Group (MOFG)

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MidWest One is our hot stock of the week and earns an Attractive rating. MidWest One, a smaller regional banking institution, had its ups and downs during 2014. The stock ended the year up only 3%, but was up 23% from its October lows. For many reasons, we feel MidWest One could be poised for a strong 2015.

Since 2009, MidWest One has grown after-tax profit (NOPAT) by 25% compounded annually. The company has increased its return on invested capital (ROIC) from 4% in 2009 to 8% last year. While MidWest One has not grown revenue since 2011, maintaining strict control of expenses has allowed the company to continue growing NOPAT. However, through 3Q14, MidWest One has begun to grown revenue again to the tune of 4% over the same time period in 2013. This revenue growth puts MidWest One in an even better position to surpass expectations when it reports full year results.

Despite MidWest One’s impressive NOPAT growth, increasing ROIC, and revenue growth through 2014, its stock price remains deflated. At its current price of ~$28/share, MidWest One has a price to economic book value (PEBV) ratio of 0.7. This ratio implies the market expects MidWest One’s NOPAT to permanently decline by 30% from current levels. This seems highly pessimistic given MidWest One’s ability to grow NOPAT over the past five years, as well as its strong fundamental results so far through 2014.

Kyle Guske II contributed to this report.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

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