With stock market correlations at all time highs, it is becoming harder and harder to outperform the market when no one pays attention to anything but headlines emanating from Europe. This is especially true in the financial sector. Every financial firm, no matter how far removed from Europe it is, trades the same. They rise and fall based on what is occurring in Europe, even if their businesses have nothing to do with Europe, or they are resilient enough to withstand the European crisis. We do not think all financial firms are created equal. Below we highlight 6 companies that either do not do business in Europe, or for whom the European debt crisis is largely irrelevant.
- American Express: American Express (AXP) is the third largest credit card issuer in the US, and caters to higher end consumers. This segment has proven to be remarkably resilient against volatile stock markets and the moderately recovering US economy. AmEx consistently reports record spending by its card members, proving its resiliency. We profiled AmEx in August, noting its declining expense ratio, continued investments and growth, and the fact that its dividend was not cut during the financial crisis, something we view as a real sign of strength. Berkshire Hathaway owns over 13% of American Express, and if Warren Buffet puts his trust in this company, we think other investors should as well.
- US Bancorp: US Bancorp (USB) owns US Bank, the largest regional bank in the United States. We think that this is the right spot to be in. It is large enough to meaningfully compete with the Big 4 banks (JPMorgan, Bank of America, Citibank, and Wells Fargo), but small enough that loan growth, acquisitions, and deposit growth actually make an impact on the company's profitability. US Bank avoided the subprime mortgage disaster, has no exposure to Europe, and reported record profits in its last quarter, to the tune of $1.273 billion.
- PNC Financial: PNC (PNC) is the second largest regional bank in the United States, and like US Bank, it is run very conservatively, growing through acquisitions, such as the purchase of Royal Bank of Canada's (RY) US banking unit. We profiled PNC in November, noting the company's recent successes. The company posted net income of $834 million last quarter, and is increasing the hold on its customers, a model made so successful by Wells Fargo. In addition, PNC owns 21.7% of BlackRock (BLK), and the continued success of BlackRock should increase the value of PNC's stake.
- Wells Fargo: As the smallest of the Big 4 US banks, Wells Fargo (WFC) is in a unique position. It is 3 times as large as its nearest American banking competitor, US Bank, but it does not have a meaningful capital markets presence. The company avoided the subprime mortgage disaster, and is famous for cross-selling its products to customers, making it terribly inconvenient to leave. Of all the major banks sued by the FHFA for costing the government billions in investment losses, only Wells Fargo was left off the list. Our profile of Wells Fargo in September noted the company's strong balance sheet, and we see the fact that it trades above book value as a sign of investors' belief in the company, not a sign of overvaluation. Wells Fargo posted record profits in the third quarter, earning $4.1 billion as its competitors floundered. Berkshire Hathaway owns nearly 7% of Wells Fargo, and Warren Buffet has stated publicly numerous times that he would buy all of Wells Fargo if regulators permitted him to do so.
- NYSE Euronext: NYSE (NYX) owns the New York Stock Exchange, as well as a variety of markets across Europe. In addition, the company owns derivatives platforms in both America and Europe, as well as NYSE Arca, its all electronic exchange. Record volatility is leading to record trading volumes, which should bode well for NYSE Euronext. Reduced equity trading will be more than made up for with an increase in derivatives trading. US options volume grew 10% in November, and even though equities volume declined by 10%, derivatives and options are far more profitable for NYSE Euronext than equities. We think that the merger with Deutsche Boerse will be successful, even if the 2 companies will need to give up more than expected. Either way, NYSE Euronext's share price on its own undervalues the company as a standalone business. The company is trading far below where it was when the merger was announced in February.
These 5 companies have what it takes to succeed in this difficult market environment. They are not dependent on a resolution of the European debt crisis to thrive and post continued improvements in operational results. Below we profile these companies financial metrics.
|Company||American Express||US Bancorp||PNC Financial||Wells Fargo||NYSE Euronext|
|GAAP EPS (2011)||$4.07||$2.39||$6.16||$2.82||$2.57|
|Revenues (2011)||$30.1 Billion||$18.7 Billion||$14.4 Billion||$81 Billion||$2.7 Billion|
|Tangible Book Value||$15.48||$16.01||$61.92||$24.13||$26.67|
|Tier 1 Capital Ratio||6%||10.8%||10.5%||7.41%||N/A|
|Price to Book||3.09x||1.6x||0.88x||1.09x||1.0075x|
|Price to Earnings (2011)||11.75x||10.73x||8.83x||9.29x||10.46x|
|Dividend (Yield)||$0.18 (1.51%)||$0.125 (1.95%)||$0.35 (2.57%)||$0.12 (1.83%)||$0.30 (4.46%)|
These 5 companies all have strong financials, growing earnings, and are trading at reasonable valuations. Any of them would make fine additions to an investor's portfolio. Not all financial firms are created the same. In this chaotic market environment, it seems investors have forgotten that each company is different, and that what affects one company does not affect another the same way. This is true even in the financial sector, where most companies are interconnected. These 5 companies, however, are able to rise above the challenges plaguing their industry and succeed. And we think that investors who add to or initiate positions in these companies will be successful as well.