One of the biggest IPOs for the month of January will likely be Santander Consumer USA (SC). The large vehicle finance company is a subsidiary of Santander (SAN), the large European and American banking giant. The IPO has already increased its expected pricing range and will likely see strong demand. However, I think investors should ignore the IPO and invest in recent Santander spin-offs or the larger banking giant instead.
Santander Consumer USA IPO
Santander Consumer USA is a full service financial company with a focus on vehicle finance and unsecured consumer lending products. The company is led by a 10 year agreement with Chrysler to offer loans under the Chrysler Capital brand.
The company's strengths:
· Technology-driven platforms drive superior credit and operational performance
· Growth-oriented business model
· Robust financial performance
· Deep access to committed funding
· Strong relationship with Santander
· Experienced management team (Founder Thomas Dundon owns 10.5% of company)
The company's strategy going forward:
· Expand our vehicle finance franchise:
o Organic growth in indirect auto finance
o Strategic alliances with OEMS, "The loans and leases originated through Chrysler Capital should provide us with the majority of our near-term expected growth."
o Growth in direct-to-consumer exposure
o Expansion of fee-based income opportunities
· Continues to grow our unsecured consumer lending platform
Santander Consumer USA is offering 65 million shares and will have more than 347 million shares total outstanding after the offering. Shares were original set to price in a range of $22 to $24, but that range was raised on Wednesday. The company plans on paying a quarterly dividend of $0.15, representing a yield of 2.5% (based on $24 offering).
To me, the company has growth, but is slightly risky. There is a huge reliance on the Chrysler partnership that is not a given to be renewed down the road. The company is also benefiting from a boost in car sales, which may not last. Investing in Santander Consumer isn't a horrible bet, I simply believe the options below are better bets.
Santander is the parent company of Santander Consumer and also the owner of other publicly traded companies mentioned below. Santander has a market capitalization close to $100 billion and is the leading bank in the Eurozone (by market cap). Santander operates in 10 main countries, but has a presence in more than 25 countries in Europe and the Americas. The 10 main countries for Santander are United States, United Kingdom, Portugal, Spain, Poland, Brazil, Mexico, Chile, and Argentina.
Several of these countries are going through rebranding of branches to better focus on the Santander brand. In the most recent quarterly report, Santander had net loans by country of:
· United Kingdom: 35%
· Spain: 24%
· Brazil: 10%
· USA: 6%
· Chile: 4%
Based on profit in the first nine months of the fiscal year, these countries represent the highest percentage:
· Brazil: 24%
· United Kingdom: 15%
· USA: 11%
· Mexico: 11%
· Spain: 7%
Santander continues to see market shares in many of its regions, including Brazil where it posted a 7% increase in loan volume and 8% increase in deposit volumes. In the emerging markets that aren't among the ten main countries, Santander saw market share gains in Puerto Rico, Uruguay and Peru. Volume and profit in many emerging market regions increased by double digits.
Shares of Santander trade at $9.00, close to 52 week highs. With a strong turnaround in Europe expected, along with key growth in emerging markets, Santander is set for years of share gains. The company is priced in the single digits for investors to see large gains in 2014 and beyond. The company plans on spinning off more of its countries operations via IPOs, which should continue to unlock value. Santander also currently yields north of 7%.
Banco Santander Brasil (BSBR)
As mentioned above, Brazil's banking operations under Santander are doing extremely well. However, shares are not reflecting that. The big worry in Brazil right now is the booming loan business that has been going on is not hitting banks, as defaults start to kick in at higher percentages.
Shares of Banco Santander Brazil hit new 52 week lows at $5.14 today. Shares have traded as high as $8.19 in the last fifty two weeks. Shares are trading down over 50% from the $12 mark they hit in 2010. The company is expected to post earnings per share of $0.68 in the current fiscal year and $0.65 in the next fiscal year, giving shares a price to earnings of under 10 on a current and forward basis.
Grupo Financiero Santander Mexico (BSMX)
Grupo Financiero was a company I recommended in an IPO preview back in September of 2012. The company is one way to play a booming middle class in Mexico and growing infrastructure spending. However, shares are up only marginally from the IPO and were down 16.4% in 2013.
One of the areas I highlighted in the IPO preview was Santander Mexico's strong position in the mortgage market. In September of 2012, the company had a 15.4% market share. That number has since increased to 15.8% and was recently boosted even further. Santander Mexico paid $41 million to acquire ING Group's Mexican mortgage business. This deal increased market share for Santander to 17.8% in the mortgage market. The acquisition gave Santander 28,000 clients and also 20 branch locations.
In the recent third quarter, credit card revenue grew 11.6%, mortgage revenue grew 12.5%, and consumer loan revenue grew 7.2%. The company remains well positioned to capture further market share gains in Mexico. Shares hit new 52 week lows today at $12.55. I believe shares are significantly undervalued to start 2014.
Banco Santander Chile (BSAC)
Banco Santander Chile is a smaller outfit under the Santander umbrella with a market capitalization of $10.5 billion. Shares were down 18% in 2013 and sit near 52 week lows at the current time. This is a stock that traded over $30 in the last 52 weeks, but remains stuck around the $22 to $23 mark.
In the recent third quarter, Banco Santander Chile saw loans grow 9.8% and deposits grow 6.1%. I believe the company will continue to see growth above 5% in key areas and should reward shareholders. Analysts see the company posting earnings per share of $2.02 in fiscal 2014 from 5.8% revenue growth.
I believe the US Consumer unit of Santander will have a strong IPO. The company has a good program of vehicle loans and continues to benefit from a booming automobile market. However, I think investors should look elsewhere to other Santander units. If you believe Europe can rebound in 2014, particularly in Spain, Santander may the best stock to buy. Other investors looking at emerging markets and to capitalize on 52 week lows should look at Santander's Brazil and Mexico units.