3. PNC Financial Services Group
Shares of PNC Financial Services Group ( PNC) closed at $61.86 Thursday, trading for 0.9 times tangible book value, and for nine times the consensus 2014 EPS estimate of $6.84. The consensus 2013 EPS estimate is $6.54. PNC pays a quarterly dividend of 40 cents, for a yield of 2.59%. The company fourth-quarter earnings of $719 million, or $1.24 a share, compared to earnings of $925 million, or $1.64 a share, in the third quarter, and $493 million, or 85 cents a share, in the fourth quarter of 2012. Like many of the large-cap banks, PNC reported a number of one-time items, including a preannounced $91 million in expenses related to mortgage foreclosures, which included $70 million for the industry settlement. Other items included "a pretax provision of $254 million for residential mortgage repurchase obligations related to expected elevated levels of repurchase demands primarily as a result of further changes in behavior and demand patterns" of Fannie Mae and Freddie Mac," as well as "a $45 million goodwill impairment charge for the company's mortgage unit, and a gain of $130 million on the sale of Visa ( V)." Together, the items lowered PNC's fourth-quarter earnings by 47 cents a share. Another major item affecting the fourth-quarter earnings was a $318 million provision for credit losses, increasing from $228 million the previous quarter, and $190 million in the fourth quarter of 2011. CFO Rick Johnson said during the company's conference call that the provision "higher than the previous guidance of $150 million to $250 million, primarily due to the completion of our implementation of regulatory guidance for loans discharged from bankruptcy. A provision of $53 million was recorded in the fourth quarter related to this guidance." O'Connor's price target for PNC's shares is $71, and he estimates the company will earn $6.52 a share in 2013, with EPS increasing slightly to $6.54 in 2014. The analyst said that "PNC stock was a meaningful underperformer in 2012 (up only 1% vs. +22% for the S&P Commercial Bank Index) and hasn't closed the performance gap much so far this year (+7% vs. +4%, respectively)," but that the shares are trading at a discount to peers, and "with the recent appreciation in BLK stock (+33% since 9/30), PNC's stake now represents $2-3 per PNC share--something we don't think is being fully appreciated by the market." PNC said it will disclose more detail on its stake in BlackRock ( BLK) when it files its annual report. The company reported that as of Sept. 30, it had a 22% economic interest in BlackRock, that its shares in BlackRock had a carrying value of $5.5 billion and a market value of $6.4 billion. PNC data by YCharts
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