Bank of America, Citibank Takeover Targets On Paper Only

An article in this morning’s Chicago Tribune illustrates how on Wall Street what looks good on paper and on spreadsheets, often doesn’t translate into the real world. The article quotes a research report put out by a major sell-side firm which highlighted several companies who are currently so cheap that they could become takeover targets. The list of names included Bank of America (BAC) and Citigroup C.

We certainly agree that an argument can be made that each of these companies are cheap on a valuation basis. However, who can actually take over these companies? Citigroup and Bank of America are the fourth and fifth largest companies in the country, and rank in the top ten in the world! So unless Exxon Mobil, GE, Microsoft, or Russia’s Gazprom are looking to diversify into the banking sector, we wouldn’t be buying these stocks in hopes that they get bought out.

Comments

[FIG trader_:]

I looked through Henry McVey's (Morgan Stanley equity strategist ) recent research for specifics in terms of coming to the conclusion that the aforementioned stocks are "cheap", but couldn't find what I hoped to find. Since company specific research is done at the analyst level, the top down view has more to do with other macro issues. But here is where I think his view is infected with bullish bias on several levels, both as a "banker", and sector analyst (he is former Financial Institution analyst). In the mid to late Nineties there was equal exuberance, when more cautioned should have prevailed during big consolidation period, not just with the Net stocks, but with the serial diluters among bank acquirers. That term was coined by former DLJ analyst, who lost his job for being somewhat skeptical. With financial stocks at or near highs, after substantial gains ($ based at least), is this a hnt that we may be near highs. In fact, it could even mean we are about to embark on one last "binge" of deals, before the garnd finale. Far be it for me to rain on the parade, but I think we are closer to the highs rather than the lows in financials, given where we are in the the credit and interest rate cycles, near peak ROEs, fair and reasonable valuations, and decelerating economic growth workdwide. As I've said in prior postings, I think it all comes down to dollar stability, and the implications of continued weakenss in the $ on confidence in gloabl financial institutions.

2006 Nov 25 11:50 AM

[FIG trader_:]

Unless one lays out the scenario for the next three years about where rates will be (long and short term), and incremental drivers of earnings and the ROE, its hard to counterargue. My guess is that we are closer to the end rather than the beginning in this "cyclical" rally in financials. It should be patently obvious, since credit costs, the largest potential swing factor on the income statement have nowhere to go but up. That puts the odds of lower earnings for 2007/2008(versus 2006) at two to one in my book, under virtually almso any "interest rate scenario; subnstantially lower in some. The only scenario in which "financials" could be considered cheap is much "lower rates" (short and long; i.e. lower than that priced into Fed Funds futures), concurrent with flat credit costs. For now the valuations seem reasonably fair, though, in my humble opinion, the stocks carry substantial risk that you are not getting paid for. I think mid single digit returns (dvds plus little else is what you'll get annually through 2009)

2006 Nov 25 03:05 PM

[FIG trader_:]

Its now going to be reasonably clear that the call for "cheap financial stocks'' by MS strategist) was a hint of temporary top for the subsector. The question as to when "they" will provide value will be better determined at lower prices and additional data, earnings, $/euro rates/ and widening spread of the 10/30 Treasuries; By anecdotal evidence is the spread rarely gets this narrow, and the reversal (i.e. rates going higher, the 30 year backing up faster than the 10) suggests this will confirm the end of the financials rally for now. Most expensive financials for long short trades AXP, SLM, FMD and mid sixed p/c stocks

2006 Nov 28 09:25 AM