Valuation: Popular Inc. (BPOP)

Company Review: Popular Inc (BPOP)

Company Profile: Popular Inc. (obtained via Google Finance)

 

Popular, Inc., incorporated in 1984, is a diversified bank holding company. The Company’s principal bank subsidiary is Banco Popular de Puerto Rico (Banco Popular or the Bank). Banco Popular has a retail franchise in Puerto Rico, with 191 branches and over 590 automated teller machines (ATMs). The Bank has trust operations in Puerto Rico. The Bank also operates seven branches in the United States Virgin Islands, one branch in the British Virgin Islands and one branch in New York. Banco Popular has three subsidiaries: Popular Auto, Inc., a vehicle financing, leasing and daily rental company; Popular Finance, Inc., a small personal loan and mortgage company with 45 offices and seven mortgage centers in Puerto Rico, and Popular Mortgage, Inc., a mortgage loan company with 32 offices in Puerto Rico. During the year ended December 31, 2006, the Company’s wholly owned subsidiary, Popular International Bank, Inc. (PIB), acquired T.I.I. Smart Solutions Inc., which develops financial processing software applications and sells hardware products.

Business and Management Review1) Is the business simple and understandable?

Popular, Inc. a financial holding company with $ 48.6 billion in assets is a complete financial services provider with operations in Puerto Rico, the United States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico with over 280 branches and offices, the Corporation offers retail and commercial banking services through its banking subsidiary, Banco Popular de Puerto Rico, as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending, insurance and information processing through specialized subsidiaries. It is a simple business to understand as they function as a regular commercial bank, by lending long and borrowing short.

2) Does the business have a consistent operating history?

Popular Inc. has maintained a consistent operating history until the sub-prime crisis astonished all the commercial banks in the U.S. This effect had an impact on the 2007 3Q earnings disclosed by Popular Inc. on October 19^th. The third quarter net income for Popular Inc. plunged to $36 million from $82.2 million a year ago. Also, diluted earnings per share fell to $0.12 from $0.28 last year and net income applicable to common stock was down at $33.024 million compared to $79.181 million in the prior year.

3) Does the system have favorable long term prospects?

There are heightened concerns regarding liquidity at the holding company level. Earnings and asset quality have been negatively affected by the relatively weak economy in Puerto Rico and mortgage exposure on the U.S. mainland. When compared to the average of major U.S. banks, Popular’s non-performing assets (NPA) ratio remains comparatively high. Elevated NPA ratios are common among Puerto Rican banks, branching from a higher level of personal bankruptcies on the island and difficult economic environment overall. This bank’s subprime mortgage exposure on the U.S. mainland further contributes to its comparatively high NPA ratio. Given the stress in the subprime mortgage area, considerable additional charges are likely. However, Popular’s subprime exposure still appears manageable overall. The volume of the subprime portfolio consists of first mortgages with an average FICO (Credit Score) at the higher end of the subprime range and a fairly conservative average loan-to-value (LTV). Further, a considerable portion of subprime mortgage exposure is within an on-balance-sheet securitization, which reduces potential losses on this portion.

4) Is management rationale?

Besides presenting liquidity problem due to their lack of current assets, we believe that management is rationale.

5) Is management candid with its shareholders?

Popular Inc. is candid with its shareholders by providing good information about its stock, investor services, management, and financial information on its website.

6) Does management resist the institutional imperative?

We do not believe the management is following the institutional imperative.

Financial and Value ReviewDefensive1) Size of firm

The market cap of Popular Inc. is $2.67 billion. “Pass”.

2) Strong financial condition

Its current ratio is less than 2. “Fail”.

3) Earnings stability

The company has had positive earnings for the past 10 years. “Pass”.

4) Dividend record

Popular Inc. has paid dividend for the past 10 years. “Pass”.

5) Earnings growth

This company has a boost of 1/3 in EPS for the past 10 years. “Pass”.

 

6) Price to earnings analysis

Its PE ratio is less than 20. “Pass”

7) Price to book analysis

Popular Inc. has a PB ratio of 0.8 and a PB*PE ratio of 6.56. “Pass”/Pass”

Conclusion

After passing 7 of the 8 test we believe that Popular Inc. is a good holding for Defensive Investors.

Enterprising:
1) Strong financial condition

This company current ratio is lower than 1.5 and its debt to NCA is higher than 1.1. “Fail”/”Fail”.

2) Earnings stability

This company contains positive net income for the past 5 years. “Pass”.

3) Dividend record

Popular Inc. currently pays dividends. “Pass”.

4) Earnings growth

They have not created earnings greater than 5 years ago. “Fail”.

5) Price

Its stock price is less than 150% of its net tangible assets. “Pass”.

Conclusion:

We would not recommend this company as an option for Enterprising Investors as they only passed 3/6 of the tests.

Valuation:

Our valuation model finds Popular Inc. to have a fair value of $10.55.

Opinion: Since the company is trading at $9.54 we believe that the stock seems to be a bit undervalued. Nonetheless, we find this company appropriate for Defensive but not to for Enterprising Investors.

None of the staff at ModernGraham held a position in Popular Inc. at the time of publication. Also, please read our disclaimer and Our Methods.