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NEW YORK (
TheStreet) -- Although plenty of investors question the value of sell-side sock analysis it remains a valuable tool for investors looking to compare performance during a volatile recovery.
While it often does not occur, investors are well-advised to periodically ask their brokers to provide analyst reports for every stock they hold.
It never hurts to have a variety of opinions, and it is especially important to consider a variety of thoughts about a particular stock and the industry you are considering. Stock analysts also have more time and means to properly cover an industry and particular players than most investors do.
At this point in the economic cycle, for example, bank stock analysts have moved away from focusing on valuing stocks against tangible book value to considering valuation against "normalized earnings," which are what a bank is expected to earn after earnings are no longer hurt by outsized provisions for loan losses or boosted by the release of loan loss reserves. Analysts also have to look beyond the "noise" of headlines related to the mortgage
Other ways that analysts can help bank stock investors at this point in the cycle are in guaging a "floor" for a stock, when considering short-term risk to earnings from regulatory factors including the Federal Reserve's coming rules to limit debit card interchange fees, or when considering take-out valuations. The former was discussed as part of
TheStreet's recent look at
10 Banks with Lower Earnings on Tap . A recent example of a sell-side analyst expressing conviction on a takeout valuation was Morgan Keegan analyst Robert Patten's recent report saying that
Texas Capital Bancshares (TCBI) would command a 40%
1. Consider an opposing viewpoint.
One veteran investor told
TheStreet "you have to separate the wheat from the chaff, and I find that roughly 10% of sell-side research is original and compelling. Bove, for example, is compelling, even when I disagree with him."
The investor was referring to Rochdale Securities analyst Richard Bove, an outspoken bank analyst who most recently made a splash while downgrading
Regions Financial (RF - Get Report) on February 16, from a buy rating straight to a sell. Bove said "speculation was high" that the company will be acquired, fed by a "belief that Regions has failed the most recent stress test and that the bank will be required to sell."
While saying a sale was unlikely at current prices, Bove added the shares were over-valued because a takeout "would occur at $5 to $6 per share." The analyst also said he thought it would be more likely that Regions would raise capital instead of selling.
The "food for thought" provided by this analysis was the "take-under" sales price. This harsh assessment bucked the trend of other analyst research around recent deals that any sale would be made at a premium that depended on a rosy scenario of economic recovery.
2. Expected actions may take longer than expected.
Another interesting tidbit was included in a March 9 Goldman Sachs report initiating the firm's coverage of
BankUnited (BKU - Get Report) with a neutral rating and $27 price target.
While analysts Christopher Neczypor and Richard Ramsden provided what seemed at first to be a "on the one hand...on the other hand," type of analysis, they made some interesting points.
First, they said their price target could be "seen as conservative, given the lack of significant credit risk," since nearly all of BankUnited's loans are covered by
Federal Deposit Insurance Corp. loss-sharing agreements. Second, they said that their price multiple of 10 times expected 2013 earnings was applied to "a more 'levered' capital basis (i.e. we are assuming acquired growth in 2013), a valuation technique we do not use for other banks in our universe."
While the "new" BankUnited -- resurrected from the old BankUnited which failed in May 2009 and was purchased from the FDIC by an investor group - is very strongly capitalized and CEO John Kanas made a point of saying in his recent discussion with
TheStreet. Kansas said his company planned to be "an important part of the consolidation story" by making acquisitions initially in the Southeast," investors looking for a short-term killing need to realize that it might take longer than expected for excess capital to be deployed. It could take years.
3. Get the local angle.
Event though analysts may be "wrong" in hindsight on their picks, the justifications for earnings estimates and price targets provided in analysis reports, along with local market insight, provide more food for thought to investors.
John Rodis of Howe Barnes Hoefer & Arnett told
TheStreet that "anyone can look at numbers and run models, but typically if you are on the sell side and have good relationships and access to management, it is a really good thing for buy side clients." He added that "the trick of the trade is to boil it down to a page or two," to help investors understand the key points while saving time.
TheStreet looked at commercial lenders based in the
Chicago area, Rodis discussed the local lenders' long-term habit focus on poaching commercial clients away from
Bank of America (BAC - Get Report) and
JPMorgan Chase (JPM - Get Report). Bank of America acquired LaSalle Bank NA of Chicago from ABN Amro in October 2007. JPMorgan Chase acquired Bank One of Chicago in July 2004, with Bank One's CEO James Dimon becoming JPMorgan's president and chief operating officer, eventually taking over as JPMorgan's CEO in January 2006.
On February 2, Rodis reiterated his neutral rating on
FirstMerit (FMER - Get Report) of Akron, Ohio - which has been expanding in Chicago through acquisitions - saying that he lowered his 2011 earnings estimate to $1.05 a share from $1.25 because of "higher non-interest income and a modest reduction in fee-based income."
With the shares declining 16% year-to-date as of March 4 to $16.67, Stifel Nicolaus analyst Tony Davis on March 7 upgraded FirstMerit to a buy rating with a $21 price target, saying the sell-off had "created an attractive trading opportunity given the prevailing valuation, the company's top flight management, superior financial profile and impressive longer term growth opportunities in metro-Chicago."
4. Find some peer comparisons.
Another way that sell-side bank analysts help investors is by providing quick comparisons of banks to their peers, using a variety of metrics to measure performance and price levels.
In a March 3 following meetings with management of
KeyCorp (KEY - Get Report) and
Huntington Bancshares (HBAN - Get Report), Jeff Davis of Guggenheim Securities said that for Key, "M&A speculation is reasonable prior to TARP redemption and a CEO change." KeyCorp announced during the fourth quarter that CEO Henry Meyer would retire in May, with president and Chief operating officer Beth Mooney taking over as the company's new chairman and CEO.
Davis said his firm didn't "know if there
anything to" the rumors of a possible sale by KeyCorp, but among "a limited pool of potential acquirers," he included U.S. Bancorp as "a natural buyer given market overlap and the potential for USB to reduce KEY's ~70% efficiency ratio," but noted that U.S. Bancorp might also "have an interest in Regions." He also said the "alleged entry of
Toronto Dominion Bank (TD) into the mix is conceivable, especially given TD's push to build its U.S. banking presence," and that a sale to
PNC Financial (PNC) "is not inconceivable, though divestitures in northern Ohio might be so heavy as to preclude a deal."
Davis said that "neither management team seemed eager to acquire," with "pending regulatory changes that were described as a decade's worth of change compressed into 12 months," among the reasons for their preference for organic expansion.
The Guggenheim report's comparison of valuation and earnings metrics is an excellent example of a tool provided by sell-side analysts that helps investors make quick comparisons between investment choices.
The forward price-to-earnings ratio based on Guggenheim's 2012 earnings estimate is 13.9 for KeyCorp and 11 for Huntington. These compare to a median forward P/E of 13.4 for 13 regional and super-regional bank holding companies. Among the regionals in the report, the cheapest by forward P/E based on the 2012 estimates is
BB&T (BBT) at 10.6 and the most expensive is
Comerica (CMA) at 15.2 times Guggenheim's 2012 earnings estimate.
The median forward P/E based on Guggenheim's 2012 estimates for the "big four" of Bank of America, JPMorgan Chase,
Citigroup (C) and
Wells Fargo (WFC) is a much cheaper 9.1.
Out of the 19 holding companies covered in the Guggenheim report, PNC Financial had the highest 2010 return on average assets, which was 1.28%. U.S. Bancorp had the highest return on tangible equity, which was 19.2%, and the lowest (best) efficiency ratio of 50%. Wells Fargo had the widest net interest margin (essentially the "spread" between a bank's average yield on earning assets and its average cost for deposits and borrowings) of 4.23%.
Written by Philip van Doorn in Jupiter, Fla.
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Written by Philip van Doorn in Jupiter, Fla.
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