From low to multiples to strong fundamentals, financial companies are heavily discounted to intrinsic value. Over the last 12 months, Barclays (BCS) and Goldman Sachs (GS) have lost around 30% of shareholder value. Despite how strong these brands are, the market has myopically focused on risks, such as leverage and regulatory hurdles. The truth is, these risks have been overblown. Perhaps nowhere is this more clear than at Barclays, which trades at a respective 8.3x and 4.7x past and forward earnings with an impressive dividend yield of 3%. The historical 5-year average PE multiple is 6.1x with a high average of 14.6x.
According to NASDAQ fan FINVIZ, Barclays is rated a "strong buy" and value is expected to nearly double north of $23 per share. At the same time, management has also executed with first quarter results being 6% above consensus. Investment banking revenues showed a beat as revenues grew 3% y-o-y, outperforming the industry average by around 1,100 basis points. From a liquidity standpoint, Barclays is also solid. The liquidity buffer is at around 173B pounds, which is more than 20% ahead of what is necessary to cover the maturity of wholesale funding next year. Group loan to deposit ratio has, meanwhile, improved.
Goldman Sachs is similarly cheap given the value. While the historical average PE multiple is 13.3x, the company trades at just 7.4x forward earnings. Like what is the case for Barclays, management has also delivered strong first quarter results that defied investor pessimism. Net revenues were nearly $10B while diluted EPS was $3.92. And yet, economic uncertainty and systemic factors have been meaningful headwinds for value creation. The European Central Bank's announcement that it would enhance its refinancing operation, however, illustrates that these headwinds are overblown. In the longer-term, the stock will generate high risk-adjusted returns from a global recovery. Strong client relations, excellent liquidity at a 14.7% Tier 1 Capital Ratio, and a low PE multiple all contribute to this favorable risk/reward story.
Andrews Development International p.l.c (ANDI:GXG) is yet another attractive financial company. It recently went public on the GXG Exchange with an asking price of 1 euro per share. This financial holding company uses the profit it generates from its deal business to purchase real estate assets (ie. multi-family properties with revenue.) Andrews main business comes from the deal volume wherein it helps companies go public, facilitates takeover activity, and provides growth financing. They hold initial stakes in the companies that they back and offer capital solutions, advisory services, and marketing functions, among other resources, that allow for value creation. The result is that clients are able to drive greater volume and unlock M&A synergies.
Management recently released their executive summary, which further strengthens my confidence in future streams of free cash flow. According to the report, the company anticipates revenue growth of 171.1% from year 1 to year 5. Earnings has been guided for 120.7% growth in the report over the same time period. Importantly, this assumes access to equity capital and financing sufficient for sustaining the financial plan. Gross margins are forecasted to recover after year 2 and hit 41.4% by year 5. If the firm is able to realize $6.4M in net profit by the last year, a multiple of 15x would put the value at nearly $100M.
In terms of liquidity, the company also appears strong. Cash balance is expected to be nearly $5.7M in year 5. Management has stated that debt obligations are not an area concern if the fundamentals hold. Better yet, management "expect[s] to increase financial sales substantially by 2012, while also increasing gross margin". Towards that end, changes in the sales force and greater awareness will likely catalyze the top-line. As started earlier, financials are at a trough given European sovereign debt concerns and, as fear dissipates, are well positioned to recover. This makes Andrews an attractive investment when it comes to generating substantial risk-adjusted returns.
Not surprisingly, value funds, which have historically outperformed growth funds, are significantly long on the sector. Financials currently make up 27.4% of the Russell 1000 Value Index Fund, which is more than the next two sector holdings (ie. health care and utilities) combined. Since the sector has a high beta, slight marginal improvements in the macroeconomy mean high marginal stock returns. Given how low the bar has been set, risk/reward remains very compelling.Disclosure:
I am long ANDI:GXG and may initiate long positions in all of the companies mentioned in this report.
DISCLAIMER: The distributor of this research note, Gould Partners, is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence. We are an investor relations consultant to Andrews and have received 100,000 euros worth of guaranteed equity compensation from the company for our services. We reserve the right to sell or buy at any time.