3 Key Reasons to Let Go of TFSL and One Alternative Stock Worth Buying

TFS Financial's Recent Performance

Over the past half-year, TFS Financial has mirrored the S&P 500’s movement, with both rising 5.7%. The company’s shares are now valued at $14.40 each, keeping pace with the broader market.

Should you consider adding TFS Financial to your investment portfolio, or is caution warranted?

Reasons We Expect TFS Financial to Lag Behind

Our outlook for TFS Financial is not optimistic. Below are three factors that suggest investors should be wary of TFSL, along with a stock we prefer.

1. Net Interest Income Indicates Weak Demand

Although banks earn money from various sources, net interest income is considered a fundamental metric due to its steady and recurring nature, contrasting with the unpredictability of one-off fees.

In the past five years, TFS Financial’s net interest income has increased at an annual rate of just 3.9%, trailing the industry average. This sluggish growth stems from its loan expansion, while its net interest margin—which measures earnings relative to its loan portfolio—has steadily declined.

TFS Financial Trailing 12-Month Net Interest Income

2. Low Net Interest Margin Signals Poor Loan Profitability

The net interest margin (NIM) is a crucial indicator of how effectively a bank generates profit from its lending operations, reflecting the gap between interest earned on loans and interest paid on deposits.

For the last two years, TFS Financial’s average NIM has been a disappointing 1.7%, significantly lower than its peers. This suggests its loan portfolio is not generating strong returns.

TFS Financial Trailing 12-Month Net Interest Margin

3. Minimal EPS Growth

Examining long-term earnings per share (EPS) trends helps determine if a company’s sales growth translates into actual profitability, rather than being driven by excessive spending.

TFS Financial’s EPS has grown by only 2% annually over the past five years, reflecting its modest revenue gains and indicating that per-share earnings have remained stable as the company expanded.

TFS Financial Trailing 12-Month EPS (Non-GAAP)

Our Verdict

While we appreciate companies that contribute to the economy, we’re not convinced by TFS Financial’s prospects. The stock currently trades at a forward price-to-book ratio of 2.1 (or $14.40 per share), suggesting it’s favored by the market and much of the positive news is already reflected in its price. We believe there are more promising opportunities available. For example, consider one of Charlie Munger’s top picks.

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