Bank-Stock Comeback: Three Trading At-or-Below Book Value With Earnings Momentum
Take it to the bank. Maybe it’s no longer a joke for investors. Using comparable ETFs as proxies, financial stocks jumped to a better start to 2012 than the broad S&P 500 index and even the popular S&P 600 index of small-company stocks:
Switching the percentage change comparison to a 5-year view from a year-to-date view shows how much ground financials have to make up since the financial crisis erupted:
But the Financial Times reported that financial stocks are trading above the book value (assets, including cash, minus liabilities) of the companies for the first time since July. These metrics suggest that bank stocks have moved beyond last summer’s onset of a European financial calamity and even the prospect of stiffer legal and regulatory attacks on the U.S. banking industry stemming from abusive mortgage lending.
Banks stocks trading for less than tangible book value or the value of cash on their balance sheet look like bargains, assuming that the negative factors that reduced the price/book value ratio are at least not getting worse. Such hopes underlie the rally, even as the European financial crisis simmers, the U.S. economic recovery remains tentative and U.S. prosecutors and regulators say they are far from the end of punishing the industry for its sins.For now, among the top four banks -- JPMorgan Chase (JPM), Bank of America, Citigroup (C) and Wells Fargo (WFC) -- only Wells Fargo is trading above book value.
But the current resurgence of optimism about bank stocks, amid modest good news about the U.S. economy, makes it worthwhile to look for bargains rather than run away in terror from the sector. The screening process involves finding banks still priced below book value that have reasonable stories of earnings growth and dividend stability. Here’s a sample, focusing on regional banks:
Pittsburgh, Pa.-based PNC Financial Services Group (PNC), one of the large banking firms that weathered the last five years relatively well, trades at just under a 1.00 price/book ratio. The reasonable 2.3% dividend yield reflects an increase in the quarterly payout last summer to 35 cents a share from 10 cents.
Fourth-quarter earnings per share below year-earlier levels reflected gains on investment transactions in the year-ago quarter. But the bank’s profit margin continued to rebound:
A better picture has emerged at Century Bancorp (CNBKA). The banking firm based in Medford, Mass, posted record 2011 profits, including a 6.8% gain in the fourth quarter. Shares trade at a price/book ratio of 0.92, with a dividend yield of 1.8%.
Among small-cap banks, Westfield Financial (WFD) in Westfiled, Mass., looks like another New England winner. Fourth-quarter net income per share doubled from 2010, as the bank was able to reduce its loan loss reserve. The dividend yield is nearly 3%, as earnings per share growth is comfortably ahead of the price/book trend.
New England banks have been particularly noticeable in the recent bank stock rebound, but the region still boosts a few bargains.
Filed under: Company Analysis