CIT Share Price Could Double by 2018
CIT Group's (CIT) - Get Report stock price spiked upwards briefly on the news last week that profits and revenue increased for the financial institution in the first quarter. However, a number of analysts and shareholder activists believe CIT's market capitalization could double before 2018.
Here's how. A group of investors including an activist fund are pressing CIT to sell off assets and use the proceeds to buy back shares in a move that could also significantly reduce its substantial regulatory burden.
And it looks like CIT may be heading their advice. CEO Ellen Alemany told analysts that CIT's No. 1 priority in the coming months is to complete a sale or spinoff of its $11 billion commercial-air business. She said that CIT continues to speak with a "wide variety of parties" and is on track to complete financial statements required for a sale or spinoff later this quarter. In addition, Alemany said in March that her intention was to use any proceeds from a potential sale of commercial air to buy back stock.
One investor familiar with the situation estimates that CIT could receive pre-tax proceeds of roughly $3.6 billion in a sale. He noted that the most likely buyer for the commercial-air business is Japan-based financial services firm Century Tokyo Leasing Corp., which formed a joint venture with CIT in 2014, and is most familiar with the business.
"I believe she's [Alemany] going to sell it and buy back half the company in share repurchases with the proceeds," said one investor, who noted that current valuations are very good, there are a lot of buyers in the commercial air space all over the world, and the business is "a dollar-denominated, high-yield asset."
Macquarie Research analyst Vincent Caintic suggested that a simple spinoff of the commercial-air business into an independent publicly-traded company would give existing CIT shareholders an upside in the range of $42 to $43 a share range, up from its recent share price of $33.18.
However, he contends that CIT could have a book value of $70 to $77 a share if it sells both the commercial-air business and its rail leasing franchise and buying back stock with proceeds. The research firm said in an April note that it reached the conclusion that the air unit will likely be sold--not spun off--after speaking to top-20 shareholders who have met CIT Group's management in recent months.
A large investor in CIT Group, who has met with the company's management since its March strategic update, told The Deal that based on his conversations with the financial institution's management he believes that a sale is more likely than a spin off even though executives can't talk publicly about the auction process. The investor says a sale would do more for the stock price.
A key contributor to the upside, Caintic notes, is that a double divestiture--air and rail--would drop CIT Group's asset size down to one that would allow the institution to exclude itself from a wide variety of government regulations. However, the company is hesitant to part with the rail business.
CIT Group is a member of a group of roughly 40 large banks and other financial institutions that have been designated by regulators as "Systemically Important Financial Institutions," or SIFIs because they have $50 billion or more in assets. In addition to tough capital and liquidity rules, SIFI regulation subjects them to costly and time-consuming Federal Reserve stress tests to see if they can survive a future financial crisis. CIT Group is on the smaller end of the group of SIFI banks and faces a disproportionately higher cost of compliance.
A sale of both CIT Group's commercial air and rail leasing businesses would reduce its asset size to below $50 billion--eliminating its costly SIFI status. In March, Alemany noted that after CIT Group separates its commercial air business its asset size would be in the "mid-50s" and that SIFI designation is "one of the factors" the firm will be thinking about.
However, CIT Group has said in recent months that it is not interested in selling its rail business despite pressure to do so from activist investment firms, including Hudson Executive Capital, according to people familiar with the situation. Alemany said that the rail unit is a "good business" for CIT. However, she also noted that a key goal is to "reduce the concentration of rail assets."
One analyst suggested that CIT Group may consider setting up a joint venture for its rail business in a way that would take the unit's assets off its books, convincing regulators to remove the SIFI designation. A CIT spokesman said that the company is "looking at all its options" in response to a question about whether it would consider setting up a joint venture for its rail business.
If CIT Group only sells its commercial air unit and does buybacks with the proceeds it would likely result in a share price that is close to $50 a share.
Should it seek to de-SIFI, CIT Group would be part of a trend of growing group of big corporations seeking to reduce their size and regulatory burden. General Electric (GE) - Get Report has sold off most of the assets of GE Capital as part of an effort to shed its own SIFI designation. MetLife (MET) - Get Reportis moving ahead with plans to sell and spinoff a large part of its U.S. retail business in its own effort to escape regulation.
In addition, other SIFIs, including American International Group (AIG) - Get Report Ally Financial (ALLY) - Get Report , Comerica (CMA) - Get Report have all come under activist pressure to break up or sell themselves based on the argument that the transactions would allow them to reduce their regulatory burden.
Washington is likely to grant GE its de-SIFI request as soon as this year. Once that happens watch for activists to escalate their pressure on companies like CIT Group to follow in its footsteps.
General Electric is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GE? Learn more now.
