Quick Background and Thesis:
Synovus Financial Corporation (NYSE:SNV) is a financial services company with $27 Billion in assets. It is based in Columbus, Georgia, and provides the following financial services: commercial and retail banking, financial management, and insurance and mortgage services. SNV has operations in Georgia, Alabama, Florida, South Carolina, and Tennessee.
Like many financial services companies, SNV suffered greatly during the financial crisis of 2008. The company was one of the largest U.S. lenders which owned nonperforming loans that made up around 5% of its holdings. According to regulators, lenders that own toxic loans of 5% of their holdings are deemed to be unsafe and unsound.
From its peak of $14.54 in 2007, SNV crashed to a low of $1.07 in September of 2011. It is now on its way up, trading at around $3.60 as of now.
The turnaround for SNV has already begun, as its 2013 YTD of 45% indicates. Even though the price of the stock has rebounded significantly from its lows, I believe SNV could be worth $9 in a bull scenario, assuming a ROE of 25% (significantly lower than the ttm ROE of 33.51%), an EPS growth rate of 8%, and a discount rate of 12%. The bull case implies an upside in excess of 100%; and for my base case the upside is 22% (I will go into my valuation methodology in more detail later on).
Per SNV's 2012 10-K, the company noted under its business highlights section, a few notable achievements that were met during the year.
-A return to profitability: SNV reported net income for FY 2012 of $771.5 million, compared to a loss of $118.7 million for the year prior.
-Deferred tax asset valuation allowance reversal: SNV recorded a $798.7 million tax benefit, and this reversal of the valuation allowance is making management more confident in SNV's ability to become more profitable and to continue to improve credit metrics.
-Continued improvement in credit metrics: SNV sold off $918.8 million worth of distressed assets, and as a result of its clean-up, SNV's NPA ratio decreased to 3.57% from 5.5% a year prior.
-Repayment to the U.S. government: SNV repaid the government $967.9 million in July of 2013 as part of the TARP program. This is a large turnaround catalyst, and going forward, SNV will experience greater profitability as it strengthens its financial position.
As stated by the CEO: "Today's announcement of our planned TARP redemption represents the culmination of a journey to return Synovus to a position of strength...We laid out and successfully executed a clear, deliberate, and aggressive plan to return Synovus to sustainable profitability. Key components of the plan included taking significant actions to strengthen credit quality, stabilize and remix the balance sheet, and improve operating efficiency while investing in the talent and technology that will enable us to support growth and enhance the customer experience."
-SNV's 2012 ROE was 34.35%, a large increase from its 2011 ROE of -6.02%. This massive improvement obviously implies that SNV has improved its profitability, although I believe a more conservative ROE is warranted because of the artificial prop-up due to the tax benefit.
I chose to use an old-fashioned dividend discount model to value SNV, because of SNV's consistent dividend to earnings ratio of 40%, and its consistent generation of dividends.
-Extreme bull case: The extreme bull case estimates a 15% growth rate, found by using the EPS growth rate formula of (1-dividend to earnings ratio)*(ROE). In this case, I used a dividend to earnings ratio of 40%, a ROE of 25% (which is much lower than its recent ROE of 33%), and a discount rate of 18%.
SNV experienced growth rates in excess of 15% back in the 2005/2006 time period--a period that, as we all know, was characterized by the ever more bullishness of the housing sector.
So, with an extra bullish scenario growth rate of 15%, a dividend to earnings ratio of 40%, and a ROE of 25%, the extremely bullish price target ends up being $12, implying an upside of around 235%. The formula that I used for this scenario: ((Net tangible assets)*(ROE))*(dividend to earnings ratio)/(Discount rate-growth rate)
-A more realistic bull case: For the more realistic bull case, I assumed an EPS growth rate of 8%, a discount rate of 12%, a ROE of 25%, and dividend to earnings ratio of 40%. Applying the same formula, I achieve a target price of $9, an upside of 151%.
An 8% growth rate is conservative for a recovering U.S. economy, as well as for my normalized SNV EPS growth rate of 10%, which was found by the formula (1-Dividend to earnings ratio)*(ROE). SNV averaged around a 18% ROE in the period between 2003-2006, and a dividend to earnings ratio of around 40%. If SNV can continue its high ROE of 30% and above, its future normalized growth rate could be around 19%.
-Base case: For my base case, I assume a revenue growth rate of 4.86%, a net income margin of 77%, a discount rate of 12%, and a dividend to earnings ratio of 40%. My base case target price is $4.40, which is an upside of 22%.
It is clear to me that SNV offers plenty of upside, with little to no downside.
SNV offers an amazing risk/reward opportunity with a base upside of 22% in the near future. As the U.S. economy continues to improve, and as SNV continues to strengthen its financial position and focus on improving its profitability, its share price will continue to rise.