3 Financial Stocks Selling for Less Than Book Value

 |  Includes: BK, HIG, TRV
by: Bret Jensen
The financials finally had a decent day Wednesday after months and months of underperforming the overall market. The XLF was up over 1% in a down market. Is this a beginning of a turnaround in the financial sector? Here are three financials that are trading below book value that could benefit greatly by a change in sentiment around the financial sector.
Bank of New York Mellon (NYSE:BK), a financial services company, provides various products and services worldwide. The company’s asset management segment offers a range of equity, fixed income, cash, and alternative/overlay products, as well as distributes investment management products. Its wealth management segment provides investment management, wealth and estate planning, and private banking solutions to high-net-worth individuals and families, charitable gift programs, endowments and foundations, and related entities.
Bank of New York Mellon just reported quarterly earnings that beat expectations and the stock is selling at under 11 times this year’s projected earnings and just over nine times next year’s expected EPS. It now sells in the bottom of its five-year valuation range based on P/E, P/B, P/S and P/CF. BK is one of the few financial firms that has managed to raise it EPS over the past five years even with the worse financial crisis since the Great Depression. It has had average earnings growth of around 2% over the past half decade and is selling at a price to book value of 0.92. It has an AA- rated balance sheet and gets the majority of its revenues from stable sources such as custodial services and investment management fees. It has a beta of 0.72 and S&P predicts it will grow earnings by an average of 13% over the next three years. S&P also has a $32 price target on Bank of New York Mellon.
Travelers Companies (NYSE:TRV), through its subsidiaries, provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States. The company operates in three segments: Business insurance; financial, professional, and international insurance; and personal insurance. The business insurance segment offers property and casualty products and services, such as commercial multi-peril, property, general liability, commercial auto, and workers compensation insurance.
A tough year so far for insured property losses worldwide has knocked down Travelers by over 10% in the last few months and it is only expected to earn around $4.28 this year after earning over $6 in 2010. However, it should rebound in 2012 with earnings of over $6 again. Travelers goes for less than 10 times those expected 2012 earnings. Its dividend yield of almost 3% also provides a nice floor for the stock. Travelers has grown its dividend by an average of approximately 9% a year over the past five years. It also had average EPS growth of around 4% a year over the past half decade despite a very challenging economic environment. It has an A- rated balance sheet, a very low beta of 0.61 and a price to book value of just 0.95. It is historically undervalued as it sells close to the bottom of its five-year valuation based on P/E, P/S, P/CF, and P/B. S&P has a price target of $72 on Travelers, which is over 20% over its current stock price.
Hartford Financial Services (NYSE:HIG), through its subsidiaries, provides insurance and financial services in the United States and internationally. The company’'s property and casualty commercial segment provides workers’ compensation, property, automobile, marine, livestock, liability, and umbrella coverages, as well as customized insurance products and risk management services, including professional liability, fidelity, surety, specialty casualty coverages, and third-party administrator services. Its group benefits segment offers employers, associations, affinity groups, and financial institutions with group life, accident and disability coverage, voluntary benefits, and group retiree health products and services.
Hartford is one of the cheapest stocks based on P/B in the S&P 500. Its price to book value ratio is just 0.52. HIG goes for just 6.5 times this year’s expected earnings and around six times 2012’s consensus EPS. It sells in the bottom half of its five-year valuation based on P/E, P/B, P/S and P/CF. It yields 1.7% and has crushed earnings estimates each of the last three quarters. It also is right at a technical support level of around $24. HIG has been hit by the same worldwide catastrophic property losses as Travelers. Hartford is a favorite holding of value based hedge funds and is also liked by Doug Kass.
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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HIG, BK over the next 72 hours.