TheStreet has identified 10 actively traded banking names -- large and small - trading below tangible book value, that investors should consider. Tangible book value per share excludes intangible balance sheet items such as goodwill, which is an asset carried by a bank to represent the market premium paid for acquisitions. Here are the 10 banks trading below tangible book value, counting down from the ones trading closed to book value.
David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar. David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream. If you can get past the cheesy title and into the meat, the book provides an investor with a wealth of knowledge, focusing on areas of the stock market that are overlooked by the most investors, and explaining how you can find value there. I believe that PHH Corp is an ideal candidate for a spin-off or a divestiture that would create significant value for shareholders. Moreover, even if a spin-off never happens, the value is there to be realized and the market appears to be in the process of reevaluating its worth. If you use either of those multiples on the average and peak earnings numbers, it becomes clear that the Fleet business is worth something not too far away from the current stock price. Or in other words, when you are buying PHH you are buying the mortgage business for very little.
I believe there are a few opportunities in the origination space that could change the growth profile of the business The first is if the company could take advantage of the pricing opportunity that exists in correspondent lending. This should have a big impact in certain parts of Nevada, Arizona, and Florida where many borrowers owe more than 125% of the value of their homes.
PHH Corp is perhaps not the best way to play the valuation gap in servicing rights. There are other companies like Newcastle Investments, Nationstar Mortgage Holdings, and Home Loan Servicing Solutions that are actively purchasing 3rd Party portfolios of servicing rights on the cheap, and in my opinion stand to gain substantially from their eventual reversion to historical norms. Another effect of rising interest rates is that which it will have on the book value of the servicing assets. PHH provides an estimate of its tangible book value every quarter as part of its investor supplementary material. Below is the estimate at the end of the first quarter as well as at year end 2011. The company is trading at a reasonably significant discount to tangible book, which in itself says something about the unrealized value. But if you look at the book value a bit closer, you realize that there is a lot of hidden value within the assets on the books. Based on our ongoing discussions with the GSEs, we believe that by the end of 2012, they may be substantially complete with their review of our seriously delinquent and defaulted related to origination years 2005 and prior, and by the end of 2013, they may be substantially complete with their review of our seriously delinquent and defaulted loans related to origination years 2008 and prior.
Traditionally it has been the preference of small originators to sell the MSR for cash up front. And there you have it. A simple supply and demand imbalance where demand for SRP’s has been decimated by the housing collapse have caused a disconnect in servicing valuations. The quality of the servicing has never been better, low interest rates, tough underwriting, good appraisals, those are the positives. A lot of potential for the servicing to gain value in the future when rates go up, but most importantly to have it in place when rates go up as a hedge against your production dropping maybe 80%.
So along with the servicing commitments, HLSS is taking over a number of credit facilities that had previously belonged to Ocwen. More specifically, the housing sector has been beaten to such a pulp in the past few years, and the stocks involved have taken such a beating, that even a stabilization at these low levels (both prices and activity) may lead to a substantial uptick in the share prices. As I wrote earlier, I believe that the mortgage servicing business provides a unique opportunity right now, and while I have started a position in Newcastle Investments in response to that, I expect to increase that position substantially over the coming weeks. I have also turned PHH Corporation into one of my largest positions. One can approach the valuation of mortgage servicing rights as the valuation of a fixed income (broadly defined) security subject to default risk and prepayment risk.
As an originator you have the option to keep the MSR on your book and service the mortgage through its life in return for the 25 basis point (or thereabouts) premium. The best bargain of the big banks Citigroup currently trades for just 91% of its tangible book value, which is very rare for one of the "big four" banks, even in the post-crisis economy.
Citigroup has already done an excellent job of growing its tangible book value since the crisis, and it should continue to grow for the foreseeable future, as the company winds down its bad assets and grows its portfolio of good loans. There is still pending litigation, and the possibility that the company will need to raise more capital and dilute current shareholders, but I believe that MBIA is improving and will handsomely reward shareholders who stick with the company. MBIA has historically traded for a pretty low valuation, as you can see on the chart below, as its business has been considered to be pretty risky. Since falling to around $8 per share in early 2010, MBIA's tangible book has more than doubled. Hartford has more than doubled in TBV per share since the financial crisis, and the company will only become more valuable as time goes on due to the renewed focus on the core businesses. I like all three of these companies for different reasons, and this is by no means an exhaustive list of good companies trading for less than tangible book. When stock is trading below its tangible book value per share, it might be considered undervalued.I have searched for profitable companies that pay rich dividends with a low payout ratio and that are currently trading below their tangible book value. Of course, while the shares are trading slightly above tangible book, JPMorgan seems to be a fantastic bargain right here, as the company is profitable and the shares trade for a historically cheap six times the consensus 2012 earnings estimate of $5.68 a share. Banks periodically review their goodwill and will write it down if they determine that the market value of previous acquisitions has declined.
Given the results of the first quarter, our ongoing discussions with the GSEs, we believe it’s reasonably possible that future losses related to repurchase and indemnification requests may be in excess of our recorded foreclosure-related reserves.
When rates go down mortgage servicing rights have to be written down in value to reflect this increased risk of prepayment.
And if you look at that core earnings over the last few years you can see that they have have been growing consistently and that the current stock price of $17 is not expensive relative to earnings. Origination is a cash heavy business and managing cash flow is key. So while it might be nice to have a steady monthly income flowing in from the MSR, typically the more immediate concern is getting cash on the books right now. The companies involved are not trading at premiums that reflect this, and in some cases they are trading at discounts to the market (PHH) or with extremely attractive dividends (Newcastle). There is a bull market out there, but only for select stocks (see Atna and Argonaut Gold for a couple of examples).
I like stocks that trade for below their tangible book value, because this represents what a company's real assets are worth. In fact, since 2010, Citigroup has grown its TBV from below $40 to about $54.40 currently, which translates to 8% annualized growth. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price.
Those stocks would have to also show a low debt.I used the Portfolio123's powerful screener to perform the search.
This leads to losses that don't eat into a bank's tangible equity, but there's no question that goodwill accounting confuses investors. HLSS is getting 32.5 bps in servicing fees and, based on the Dec 31st estimate of fair value, they will only pay 41 bps up front. An important measure of value is the book value per share-total assets minus intangible assets and liabilities divided by the number of outstanding shares. If a company is trading for below its TBV and has lots of potential to grow and improve in the future, or has potential to improve the TBV itself, it's pretty hard to go wrong. MBIA may be the riskiest company mentioned on here, but the possibility of doubling in value in four years may be worth it! There is some ongoing execution risk here, which could keep the valuation low, but the improving economy means rising insurance premiums in the company's core property-casualty business, which means a higher intrinsic value.
If you look at FIG, the stock is at $3.75 right now and fully diluted Class A and Class B shares are a little less than 500M. I am looking at FIG right now and it’s a tough slog; its difficult to get the details about what they actually own and what the value actually is because of the nature of their corporation of funds structure. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
We believe that improvement in the economic conditions will be reflected in continued growth in our service unit counts. In contrast, under current rules MSRs are included in capital up to 90% of fair value or book value, whichever is lower. In this article, I describe three of these stocks, which in my opinion can reward an investor a capital gain along a very rich dividend.(click to enlarge)International Shipholding Corp.
For, experts say that the price-to-book value indicates just whether the stock is undervalued or overvalued, and has to be seen with other factors such as the company's earnings record. However, for most investors, it's a good starting point to look for undervalued stocks.For the record, more than one-fourth stocks in the Bombay Stock Exchange (BSE) 500 index are trading at less than their book values.
Among the two analysts covering the stock, one rates it as a strong buy, and one rates it as a buy.On July 31, International Shipholding reported its second-quarter financial results. Dividing this by the number of shares will give the book value per share."When compared with the market value, book value can indicate whether a stock is overvalued or undervalued. For companies with negative earnings which cannot be valued using the price-to-earnings ratio, the price-to-book value multiple can be used, especially for relative comparison, as the number of companies with negative book value is far less than the number of companies with negative earnings," says Rajiv Mehta, assistant vice president, research, India Infoline."It is useful when earnings are low and the price-to-earnings multiple does not reflect the business's true worth. If it is widely believed that the company's performance will deteriorate, its stock will possibly trade at a discount to its book value.
Another reason could be belief that the company is adopting aggressive accounting policies to bloat its net worth.Pankaj Pandey, head of research, ICICI Direct, looks at the positive side. It may be a good opportunity to own the stock at a discounted price.""Book value should not be seen in isolation. Investors should adjust for these factors.Also, in industries such as information technology, where the requirement for capital is low, the book value tends to be low. For example, a company's book value may look high, but if the management is unable to add to it, it is futile. Or, an emerging company's book value may be small but may not capture the future growth potential.Dipen Shah, head, private client group research, Kotak Securities, says, "It all depends upon what type of company we are talking about. While this has made yarn and textile manufacturing unviable, Saha of Axis Securities believes this is an opportunity for companies like VTL which earn a significant amount from yarn exports. VTL has expanded during the lean period, which is reflected in its steadily-increasing book value. On February 13, the stock was trading at a 40% discount to its book value.Saha of Axis Securities says, "We believe that BEML will be the biggest gainer once regulatory hurdles that are impacting the mining sector are removed. Given the green shoots of revival visible in the economy and the improved order book from defence organisations, BEML is poised for a turnaround in 2014.
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