Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
Buying a Bank With a Prize in Its Vault by Jack Willoughby
Summary: The recent chill in credit markets may have put "sell" more on the minds of investors than "buy," especially for financial stocks, which are highly susceptible to the crisis, but Barron's says the sell-off has provided an opportunity to pick up shares of Marshall & Ilsley (NYSE:MI), Wisconsin's biggest bank, at a discount. With $56B in assets and a $12B market-cap, M&I gets some 60% of its roughly $3.2B in revenue from corporate loans, commercial and residential real estate, and consumer finance, while 7% comes from wealth-management services and the rest from its Metavante electronic-payments unit, which is to be spun off. With shares down some 13% this year as opposed to 8.5% for the S&P financial index, M&I trades at an 8% discount to other regional banks based on its 2008 earnings outlook, and 24% based on book value. Even though rising loan problems and slower-than-expected growth plagued M&I's second-quarter earnings (as they did other banks), Barron's says it, nevertheless, doesn't deserve to trade in-line with the group, much less at a discount. And those peers don't have Metavante. Indeed, analysts see the stock at more than 20% above recent levels 12 months out. "You're essentially buying the bank at normalized earnings multiples and getting Metavante for free," says one fund manager. M&I will spin off 75% of Metavante to shareholders and Warburg Pincus will buy the rest. All that taken into account puts M&I's value at $52.13, or about 25% above last week's level, Barron's says. M&I could use the funds it receives from the spin-off for acquisitions, stock buybacks, upgrades to its existing branches or to increase its $1.24/share dividend.
Related Links: Marshall & Ilsley Spinning Off Payment-Processing Unit • US Banks Report Deteriorating Credit Quality as Borrowers Don't Pay Bills • Looking Ahead to What Comes Next in the Financial Sector