3 Reasons to Sell TFSL and 1 Stock to Buy Instead

TFS 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 5.7% to $14.40 per share while the index has gained 5.7%.

Is now the time to buy TFS Financial, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think TFS Financial Will Underperform?

We don't have much confidence in TFS Financial. Here are three reasons you should be careful with TFSL and a stock we'd rather own.

1. Net Interest Income Points to Soft Demand

While bank generate revenue from multiple sources, investors view net interest income as a cornerstone - its predictable, recurring characteristics stand in sharp contrast to the volatility of one-time fees.

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

The net interest margin (NIM) is a key profitability indicator that measures the difference between what a bank earns on its loans and what it pays on its deposits. This metric measures how efficiently one can generate income from its core lending activities.

Over the past two years, we can see that TFS Financial’s net interest margin averaged a poor 1.7%. This metric is well below other banks, signaling its loans aren’t very profitable.

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.

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

We cheer for all companies supporting the economy, but in the case of TFS Financial, we’ll be cheering from the sidelines. That said, the stock currently trades at 2.1× forward P/B (or $14.40 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward one of Charlie Munger’s all-time favorite businesses.

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