Analyst Report: Vcbi

ANALYST REPORT

Summary:

P/S ratio | 1.28 |

Analysts’ consensus annual earnings forecast growth for next 5 years | 10% |

Morningstar profitability grade | C |

Table 1: VCBI: P/S ratio, consensus annual earnings forecast growth for next 5 years, Morningstar profitability grade (MSN Money, 2009a; Yahoo! Finance, 2009; Morningstar, 2009b)

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Chart 1: VCBI : Price from January 1, 2009 to November 19, 2009 (MSN Money, 2009c)

Virginia Commerce Bancorp, Inc. (VCBI) is the parent company of Virginia Commerce bank. Through the bank, VCBI offers business and consumer banking services, primarily for the Northern Virginia suburbs of Washington D.C (Reuters, 2009). I analyzed the merits of investing in VCBI, and my findings are presented in this report.

First of all, the markets’ view on VCBI’s earnings growth prospects, as reflected in price – to – sales ratio (P/S ratio), was examined. P/S ratio is a ratio of a company’s current stock price to its revenue per share for the past 12 months (Investopedia, 2009). P/S ratios greater than 3 imply high growth prospects, and such stocks are known as growth stocks. On the other hand, ratios of less than 2.5 imply poor growth prospects, and stocks in this category are known as value stocks (Domash, 2006, pp. 5, 254 - 255). The P/S ratio of 1.21 (MSN Money, 2009a). makes VCBI a value stock. In other words, the markets view VCBI as a company with poor earnings growth forecasts.

VCBI is in the value category because its performance was adversely affected by the financial crisis. In the first three quarters of 2009, VCBI set aside more than $80 million for possible losses from bad loans (MSN Money, 2009b; Echols, 2009). Consequently, in the third quarter of 2009, VCBI generated a loss of $0.21 per share; a loss 457% higher than expected by the markets (Yahoo! Finance, 2009; Echols, 2009).

Increased loan loss allowance, however, that accounted for the majority of the loss, enhanced the company’s recovery...