Seeking Alpha
Research analyst, value, growth at reasonable price
Profile| Send Message| ()  

The large banks are currently sitting on a large pile of cash and they are no longer on life support like they were in 2008. Granted, they do need to improve their balance sheets, but that is something that will take time. Banks such as Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) have plenty of cash to make acquisitions. The small and mid-cap banks have become so undervalued that they are trading near or even under book value. This is creating an excellent opportunity for the large banks to acquire the smaller banks, increasing their revenue and market share. By acquiring small banks, the large banks have instant access to an infrastructure of existing customers and new regional markets. With that in mind, let’s explore some of these takeover candidates.

Comerica Incorporated (CMA) is a Dallas, Texas based mid-cap regional bank. They operate primarily in Texas, Arizona, California, Michigan, and Florida, with select businesses operating in some other states and in Canada and Mexico. Comerica is currently trading at an incredible value: they have a forward PE of 9.87, a PEG of 0.70, and their stock price of about $23.88 is actually less than their book value per share of $34.15. It is rare for a stock to trade under book value, so this is a great buying opportunity over the long-term. CMA is posting positive revenue, earnings, and cash flow. They are expected to grow earnings annually at 14.18% over the next five years and they pay a modest dividend of 1.8%.

United Bankshares (UBSI) is a West Virginia based small-cap bank that operates 112 full service offices in Virginia, West Virginia, Ohio, Maryland, and Washington, D.C. Their stock is well valued with a forward PE of 11.53 and a PEG of 1.41. The stock price is trading at only 1.15 times book value per share. UBSI has healthy profit margins of 26.86% and nice operating margins of 40.61% Their operating cash flow of $92.4 million will easily chip away at their manageable debt of $541.6 billion. They have a total cash figure of $512.1 million. When their very generous dividend of 6.1% is combined with their annual expected five year earnings of 8.55% - their total annual yield (dividend + stock appreciation) over a five year period should be around 14.65%.

City National (CYN) is a Los Angeles based mid-cap bank that operates a total of 73 offices in California, Nevada, and New York City. City National shows good value with a forward PE of 10.45 and a PEG of 0.99. Their stock currently trades at only 1.04 times book value per share. They have a total cash figure of $1.2 billion compared to debt of $881.1 million. CYN’s operating cash flow is $496.5 million and they enjoy a profit margin of 16.18% and an operating margin of 30.91%. They pay a dividend of 2.1% and are expected to grow earnings annually at 11.6% for the next five years.

Signature Bank (SBNY) is a New York City based mid-cap bank which operates 23 private client offices in the New York City area. With a forward PE of 13.71 and a PEG of 1, Signature shows good value. Their stock trades at only 1.99 times book value per share. Signature has a profit margin of 32.3% and an operating margin of 56.57%. They have an operating cash flow of $142.1 million. Signature posted a nice quarterly earnings growth rate of 64.4% and quarterly revenue growth of 37.6%. They are expected to grow earnings annually at 14% for the next five years, which is higher than the industry average of 9.44% and higher than the average expected annual earnings for the companies in the S&P 500 of 10.82%.

Texas Capital Bancshares (TCBI) is a small-cap Dallas based bank that has offices in Dallas, Fort Worth, Houston, San Antonio, and the Cayman Islands. Texas Capital is well-valued with a forward PE of 12.07 and a PEG of 0.78. Their stock trades at only 1.61 times book value per share. Texas Capital is benefitting from a profit margin of 19.57% and an operating margin of 38.72%. They reported quarterly revenue growth of 38.2% and quarterly earnings growth of 106.6%. Although they don’t pay dividends, their five year expected annual earnings rate of 16.24% more than makes up for it.

click to enlarge image


Conclusion

These are all well-valued banks, as most financial institutions are due to the recessionary fears in the marketplace. Although the market may beat them up in the near term, they should all thrive in the long-term (10 – 20 years). The current unloved nature of the financials has created a historic time to pick up companies with great value. The larger banks have a great opportunity to acquire these smaller companies to grow revenue and increase market share.

Source: Why These 5 Banks Are Prime Takeover Targets