Huntington Bancshares: A Regional Lender With Strong Insider Buying Is 20% Undervalued

Includes: FITB, HBAN, KEY
by: Bret Jensen

Huntington Banchshares (NASDAQ:HBAN): Huntington Bancshares Incorporated operates as the holding company for The Huntington National Bank that provides commercial and consumer banking services. It offers deposit products, including checking accounts, savings accounts, interest bearing and non-interest bearing demand deposits, time deposits, money market deposits and brokered deposits and negotiable certificate of deposits. The company's loan portfolio comprises home equity loans and lines of credit, first mortgage loans, direct installment loans, small business loans, automobile loans and leases, residential mortgage loans, commercial and industrial loans and leases and commercial real estate loans.

Overview: This midwestern regional lender had a near death experience back in the depth of the financial crisis. The stock, which sold in the 20s prior to the mortgage meltdown, got down to as low as $1 as its ill timed purchase of Sky Financial in June 2007 contributed heavily to its near demise. It has recovered nicely since then and currently sells at $6.75.

Valuation: HBAN sells for under 12 times expected 2011 earnings of 58 cents and less than 10 times 2012's consensus of 68 cents. Its operating margin is significantly better than two of its key competitors, Fifth Third (NASDAQ:FITB) and Keycorp (NYSE:KEY). It pays a minute dividend of 4 cents a share but that should increase substantially as it recovers from the crisis.

Favorable trends/catalysts: Huntington has several trends and catalysts that make the stock attractive.

  1. Insiders have stepped up and bought a million dollars in company stock in last few weeks.
  2. HBAN paid off its 1.4B TARP commitment by issuing new shares in early 2011. Albeit dilutive, this will save the company 120mm annually in costs.
  3. Huntington's reserve ratio is higher than its peers while its non-performing loan ratio is less. This will allow HBAN to release more of these reserves if credit quality continues to improve as expected.
  4. It deposit mix continues to shift favorably, resulting in lower deposit costs.
  5. HBAN's equity capital ratios are in the top tier of regional banks.
  6. Dividend is likely to be increased in 2H11.
  7. Given improving financial position it could be able to make strategic acquisitions or possible become a target itself.
  8. HBAN and its banking brethren have significantly underperformed the S&P over the last year and should benefit from some sector rotation that should occur out of other higher performing sectors.

Recommendation: Given its continued recovery and improving prospects, a conservative valuation on HBAN is 12 times 2012 earnings, which is on the low end of its five year valuation range (2002-2006) prior to the financial crisis. This gets us to around $8.20 and a 20% plus upside from current stock price. S&P has an $8 target and Credit Suisse's price target is $9. BUY

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HBAN over the next 72 hours.