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Summary

  • Popular is a hidden gem that the market has overlooked.
  • Popular is trading at an extremely attractive valuation, especially compared to its peers in the foreign regional bank industry.
  • Popular has solid upside potential, even when considering conservative growth estimates.

Everybody loves a good deal, right? For a long time, the financial services sector was the go-to value play. And, while many firms still trade at relatively cheap valuations, they lack the deep value appeal that bargain hunters are looking for. But out there in the crazy world of regional banks, there are still those hidden gems out there. One of which is Popular, Inc. (NASDAQ:BPOP).

About Popular

Popular is a regional bank with a presence in the US (with about 90 branches in 5 states, 40 of which are in New York/New Jersey), Puerto Rico, the Caribbean, and Latin America. The company offers various products and services, from commercial loans to financial advisory.

Recent Developments

  • Popular owes $935 million in TARP money. The company submitted an application in mid-October to repay the funds, and is awaiting approval.
  • In December, Popular sold 5.8 million shares of Evertec Inc. (NYSE:EVTC) (a payment processing company) for an after-tax gain of $99 million; Popular retains a 14.9% stake in Evertec.

Valuation

Popular, by many metrics, trades at a relatively attractive valuation. One of the best ways to demonstrate this is to compare apples to apples. Below is a list of the valuations of some comparable foreign regional bank peers, including Bancolombia S.A. (NYSE:CIB), CorpBanca (NYSE:BCA), and First Bancorp (NYSE:FBP). Due to Popular's strong presence in New York, New York Community Bancorp Inc. (NYSE:NYCB) is also included:

BPOP

CIB

BCA

FBP

NYCB

Industry Average

Market Cap (billions)

$3.13

$11.23

$3.78

$1.14

$7.20

$13.00

Share Price

$30.28

$52.72

$16.64

$5.54

$16.28

______

Book Value

$44.26

$32.62

$13.50

$5.61

$13.01

______

P/B

0.66

1.61

1.20

0.97

1.24

1.3

P/E

5.24*

13.33

11.09

n/a

15.13

11.00

ROA

1.66%

1.34%

1.08%

(1.28%)

1.05%

n/a

ROE

13.72%

12.45%

12.38%

(12.18%)

8.35%

9.2%

* Net income for the 4Q13 was helped by sale of shares in Evertec

Looking at the numbers, it becomes quite clear that Popular is a steal at current valuations. One of the most important metrics to consider is the Price/Book ratio. Below is a table modeling valuations based on book value growth and the P/B multiple. Note that these calculations are based on the assumption that book value grows at a 5% annual clip (for FY2013, Popular's BV grew 12.47% YoY). This model displays the potential returns over a 5-year period.

P/B

BV ($)

Stock Price ($)

Annual Return (%)

0.75

56.49

42.37

6.95

1.00

56.49

56.49

13.28

1.25

56.49

70.61

18.45

1.5

56.49

84.74

22.85

Those returns are nothing to scoff at, especially considering that the ultra-conservative estimate would still return 6.95% a year. But for those optimists out there, what would the returns look like for a 7.5% annual growth in book value? Again, this is over a 5-year period.

P/B

BV ($)

Stock Price ($)

Annual Return (%)

0.75

63.54

47.66

9.50

1.00

63.54

63.54

15.98

1.25

63.54

79.43

21.27

1.5

63.54

95.31

25.78

Those returns are nothing to write off, but keep in mind that this model paints a rosy picture for the future. Realistically, one should give more weight to the conservative estimates.

So Why Is Popular So Unpopular?

A company trading at such cheap valuations must have something wrong with it, right? Well, Popular isn't perfect - there are still some credit quality issues, but at such a steep discount, I think that the risk is very tolerable. When you're bargain hunting, you have to make some trade-offs, and in the case of Popular, the benefits seem to significantly outweigh the costs. There are few great bargains left in the market, and Popular has managed to fly under the radar for quite some time.

Source: Why Is Popular So Unpopular?