Cullen/Frost Has Earned Its Premium, and More

NEW YORK ( TheStreet) -- On the surface, the stock of Cullen/Frost Bankers ( CFR) looks expensive, but the San Antonio lender appears primed for strong loan growth in its home state of Texas.

Cullen/Frost's shares closed at $62.53 Monday. The shares trade for 15.7 times the consensus 2014 earnings estimate of $3.98, among analysts polled by Thomson Reuters. That is the highest forward price-to-earnings ratio among the 24 components of the KBW Bank Index ( I:BKX).

That forward P/E ratio looks especially high when compared to the largest U.S. banks, but the premium is justified because of Cullen/Frost's amazingly consistent long-term track record for strong earnings, and because of the bank's growing commercial loan pipeline.

It isn't surprising to see the biggest U.S. banks trading at low P/E multiples, because of their long-term earnings volatility and because of the regulatory and political targets on their backs:
  • Shares of JPMorgan Chase (JPM) closed at $49.67 Monday, trading for 8.4 times the consensus 2014 EPS estimate of $5.94.
  • Citigroup (C) closed at $48.92 Monday, trading for 9.2 times the consensus 2014 EPS estimate of $5.32.
  • Wells Fargo (WFC) closed at $38.20 Monday, trading for 10.0 times the consensus 2014 EPS estimate of $3.81.
  • Bank of America (BAC) closed at $1298 Monday, trading for 10.1 times the consensus 2014 EPS estimate of $1.29. It's fascinating to see investors get this excited for Bank of America, which has had many recent successes in its efforts to curb its exposure to mortgage repurchase demands from institutional investors, but JPMorgan and Wells Fargo are much stronger earners, at least for now.

Strong Earnings, Even in Bad Times

Of course, all of the "big four" banks listed above have suffered from at least some earnings weakness in the aftermath of the credit crisis. According to data supplied by Thomson Reuters Bank Insight, JPMorgan had a marginal return on average assets (ROA) in 2008, at the height of the crisis, while Citigroup had negative ROA during 2008 and 2009. Bank of America had negative ROA in 2010, and has had marginal full-year earnings performance in 2011 and 2012, as it has worked through mortgage putback demands. The strongest performer among the big four in the wake of the crisis has been Wells Fargo, with its worst performance being in 2008, when its ROA was 0.38%.

On average, the strongest earnings performer over the past 10 years among the 24 components has been U.S. Bancorp ( USB) of Minneapolis, with a mean ROA of 1.68% and a mean return on common equity (ROCE) of 18.13%. U.S. Bancorp's shares closed at $33.50 Monday, trading for 10.3 times the consensus 2014 EPS estimate of $3.24. USB's an obvious bargain among bank stocks, especially when considering that it is still the strongest earner among the big players.

But if you are looking for consistently strong earnings with no surprises, Cullen/Frost is the ticket. The bank's mean 10-year ROA through 2012 was 1.37%, trailing only USB among components of the KBW Bank Index. Cullen/Frost's mean 10-year ROCE through 2012 was 14.08%, trailing USB and Wells Fargo, which had a mean 10-year ROCE of 15.45%.

But over the 10-year period, Cullen/Frost's minimum annual ROA was a solid 1.12%, with Commerce Bancshares of Kansas City, Mo., coming in second place, with a minimum ROA of 0.95%. Cullen/Frost's minimum annual ROCE over the 10-year period was 9.76%, in 2009. Only U.S. Bancorp had a higher minimum annual ROCE, of 10.13%, also in 2009.

Then again, at the end of 2009, Cullen/Frost had a tangible equity ratio of 8.56%, according to Thomson Reuters Bank Insight, compared to a much lower 5.91% for USB.

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