WaMu: Only for the Bravest of Investors

Word that Washington Mutual, Inc. (WM) is in talks with private-equity firm TPG regarding a $5 billion cash infusion has the stock up over 26% Monday. WaMu desperately needs a boost as its stock has been in retreat for the better part of a year.

Over the last few months, the company has cut its dividend by 73%, eliminated 3,000+ jobs and raised more the $3.7 billion through the issuance of preferred stock. The stock price has reflected this dire situation; as of Friday’s close, it has lost more than 70% of its value in just a year’s time. WaMu has taken punishing losses from bad calls in the subprime mortgage market, which have to date cost the company about $3 billion. A cash infusion from TPG will ease mounting capital-requirement pressure on WaMu and today stock investors are applauding the deal.

The $5 billion investment will significantly dilute the value of the current shareholders’ stake in the company, but after seeing the stock’s value plunge more than 70% in this crisis already, shareholders are unlikely to be upset if the infusion helps WaMu weather this storm. The TPG investment may be an inflection point for the mortgage crisis—the point where savvy investors finally find compelling value in some of the financial companies hardest hit by the credit crunch.

That being said, there is still a lot of risk involved in the deal as WaMu is heavily impacted by the troubles in the mortgage market, especially in some of the hardest hit regions such as California and Florida. WaMu grew quickly from a regional savings and loan in the Pacific Northwest, into a national force riding a wave of profits from subprime and adjustable rate mortgages. Now, with the subprime and adjustable rate mortgage markets in shambles, it is feeling the pain.

Ockham Research is maintaining a Hold rating on WaMu stock. Our methodology is heavily weighted towards sales and cash-flow metrics. We employ a value methodology and when a stock has fallen out of favor with the market to the extent that WaMu has, it is likely going to be attractive to us based on historical norms. However, there are significant issues with WaMu that give us more than just a little concern. For example, the market has historically been willing to pay price-to-sales of between 1.326 and 1.97 for the stock.

The current price-to-sales is currently only .578, but when you consider that the price has declined so much (about 70% in a year) this metric conceals the 40% decline in revenue reflected in our estimates. Even more distressing is the fact that cash flow is negative at present because of large losses on subprime and other mortgage-related investments. Thus we realistically cannot compare the stock’s current price-to-cash-flow valuation to previous historical norms.

In short, assuming that WaMu survives this mess, the stock may represent a good value at current price levels. However, there is enough uncertainty about their survival that WaMu share’s are only suitable for the most stout-hearted and patient investors.

Disclosure: None

Comments

[PJ568]

Wonder what it takes to get a Sell rating?

[sf1969]

Filing Chapter 13 bankruptcy!

[kingofithaki]

urgh...can't wait to nov 2010 when basel2 tier1 rules get this phony loan problem over with...message to little banks...stop screaming that your grandpappy stole this bank fair and square and you aint lettin the big boys force you into being some executive vp...be smart...ask for convertable preferreds and hit the golf links so that the rest of us can get on with our lives

[selector]

Tired of being "tier 2" shareholder. Why can´t existing holders buy the stock at $8.75? Too dangerous for management to call a rights issue? Short interest has become the perfect excuse for managements to issue stock for themselves, family & friends at discount prices

[lexchoice]

I took the chance today with a buy at $12, wish me luck!