Banks Feature Industry Review

A Glimpse at the Banking Industry – May 2015

A Glimpse at the Bank Industry

While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the banking industry, selecting the five most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 500 companies reviewed by ModernGraham, 18 were identified as being closely related to the banking industry.  Of those, four are suitable for the Defensive Investor, nine are suitable for the Enterprising Investor, and the remaining five are considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 51.3% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 20.25.  The industry as a whole, therefore would appear to be significantly undervalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Stars

The following companies have been rated as the most undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

Fifth Third Bancorp (FITB)

220px-Fifth_Third_Bank.svgFifth Third Bancorp qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings stability or growth over the last ten years, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $0.01 in 2010 to $1.62 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.53% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)

Citigroup Inc. (C)

220px-Citi.svgCitigroup passes the initial requirements of the Enterprising Investor, but not the more conservative Defensive Investor. The Defensive Investor has issues with the company’s inconsistent dividend history, low level of earnings growth over the last ten years and the lack of earnings stability over that time frame. The Enterprising Investor has no initial concerns. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from a loss of $6.47 in 2011 to an estimated $3.74 for 2015. This is a very strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 2.86% over the next 7-10 years. The ModernGraham valuation model returns an estimate of intrinsic value falling above the current price, indicating that the company is undervalued at the present time.  (See the full valuation)

KeyCorp (KEY)

KeyBankKeyCorp qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings stability over the last ten years, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from a loss of $0.35 in 2011 to an estimated gain of $0.98 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 3.34% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)

Wells Fargo & Co. (WFC)

500px-Wells_Fargo_Bank.svgWells Fargo & Co. passes the initial requirements of the Enterprising Investor as well as the more conservative Defensive Investor. In fact, the company passes all of the requirements of both investor types, which is a rare accomplishment. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $1.83 in 2010 to $3.60 for 2014. This is a strong level of demonstrated growth, which is well above the market’s implied estimate for earnings growth of only 3.37% over the next 7-10 years. In fact, the historical growth is around 19.4% per year, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still returns an estimate of intrinsic value falling above the current price, indicating the company is undervalued at the present time.  (See the full valuation on Seeking Alpha)

State Street Corporation (STT)

220px-State_Street_Corporation_logo.svgState Street Corporation qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the lack of earnings stability or growth over the last ten years, while the company passes all of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $2.03 in 2011 to an estimated $4.66 for 2015.  This level of demonstrated growth outpaces the market’s implied estimate of 4.23% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.  (See the full valuation)

The Full List

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Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
FITB Fifth Third Bancorp E 3/26/2015 $62.50 $20.51 32.82% 12.66 2.54%
C Citigroup Inc E 4/23/2015 $144.14 $54.97 38.14% 14.70 0.36%
KEY KeyCorp E 5/23/2015 $37.78 $14.90 39.44% 15.20 1.74%
WFC Wells Fargo & Co D 2/12/2015 $135.54 $56.00 41.32% 15.56 2.68%
STI SunTrust Banks, Inc. S 11/11/2014 $98.84 $42.90 43.40% 16.69 2.24%
STT State Street Corporation E 5/22/2015 $179.36 $78.62 43.83% 16.87 1.53%
HBAN Huntington Bancshares Incorporated E 3/23/2015 $25.62 $11.26 43.95% 16.81 2.13%
CMA Comerica Incorporated E 4/1/2015 $103.36 $48.67 47.09% 18.16 1.73%
RF Regions Financial Corporation S 1/27/2015 $20.30 $10.22 50.34% 19.28 2.35%
USB U.S. Bancorp D 5/5/2015 $82.35 $43.57 52.91% 14.48 2.25%
JPM JPMorgan Chase & Co. D 2/26/2015 $125.23 $66.47 53.08% 13.79 2.65%
PBCT People’s United Financial, Inc. E 2/20/2015 $27.36 $15.42 56.36% 21.72 4.35%
ZION Zions Bancorporation S 2/17/2015 $43.53 $29.02 66.67% 25.68 0.83%
PNC PNC Financial Services Group Inc D 5/13/2015 $138.50 $95.22 68.75% 13.96 2.14%
BBT BB&T Corporation E 5/14/2015 $55.48 $39.41 71.03% 15.76 2.74%
MTB M&T Bank Corporation E 2/11/2015 $172.10 $123.16 71.56% 16.67 2.27%
BAC Bank of America Corp S 1/24/2015 $0.00 $16.75 N/A 42.95 1.19%
HCBK Hudson City Bancorp, Inc. S 4/7/2015 $0.00 $9.63 N/A 53.50 1.66%

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To view the MG Value and PEmg information,  you must be logged in as a premium member.  Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
FITB Fifth Third Bancorp E 3/26/2015 $20.51 2.54%
C Citigroup Inc E 4/23/2015 $54.97 0.36%
KEY KeyCorp E 5/23/2015 $14.90 1.74%
WFC Wells Fargo & Co D 2/12/2015 $56.00 2.68%
STI SunTrust Banks, Inc. S 11/11/2014 $42.90 2.24%
STT State Street Corporation E 5/22/2015 $78.62 1.53%
HBAN Huntington Bancshares Incorporated E 3/23/2015 $11.26 2.13%
CMA Comerica Incorporated E 4/1/2015 $48.67 1.73%
RF Regions Financial Corporation S 1/27/2015 $10.22 2.35%
USB U.S. Bancorp D 5/5/2015 $43.57 2.25%
JPM JPMorgan Chase & Co. D 2/26/2015 $66.47 2.65%
PBCT People’s United Financial, Inc. E 2/20/2015 $15.42 4.35%
ZION Zions Bancorporation S 2/17/2015 $29.02 0.83%
PNC PNC Financial Services Group Inc D 5/13/2015 $95.22 2.14%
BBT BB&T Corporation E 5/14/2015 $39.41 2.74%
MTB M&T Bank Corporation E 2/11/2015 $123.16 2.27%
BAC Bank of America Corp S 1/24/2015 $16.75 1.19%
HCBK Hudson City Bancorp, Inc. S 4/7/2015 $9.63 1.66%

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Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

 

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