Wachovia on the Cheap? Think Again

I have heard many opinions about the state of the financials in the United States. The arguments are that either these stocks are already at, or close to a bottom. I don't believe we are there yet.

I know there are plenty of opinions that believe that this is a housing crisis. I think the housing market is bad, but believe the leverage that financials had on subprime lending is going to be even worse. In some instances, banks are writing off more than they have earned in their entire history of doing business. The biggest problem is that forclosures look to at least be holding steady and maybe even increasing.

There is very little that the Fed or Government can really do about it either. Inflation is decreasing our ability to cut rates more. They are still loaning to banks and in the case of IndyMac (IMB), they are bailing them out. They are saying there will be no more bailouts, but I believe that they will have to. More importantly, some of these companies could get purchased, like Countrywide (CFC) did by BoA, and this could cause stock prices to move higher, but not if they continue to decrease or remove their dividends and issue stock, diluting the value of their companies. For those who think that this is a good entry point, remember Lehman (LEH) and my call on theupdown.com to short it - it is now down 52% over the last 30 days.

Wachovia (WB) is another bank that looks to have trouble going forward. During the first quarter of this year they posted an earnings loss of $350 million. $2 billion of market related losses contained $729 million of unfunded leveraged finance positions. They decreased their dividend by 41% at that point, which has already risen to a 13% yield. They scariest highlight of the first quarter meeting was that they planned to raise $7-$8 billion through a public offering.

Looking at these types of numbers, this company could still see significant losses, as it seems improbable they can keep paying a 13% dividend yield with negative EPS. With respect to how long the company is looking at difficulties, they stated that they will continue "robust provisioning" through 2008-2009. Their $2.1 billion in capital retention per year along with announced possible public offerings could see up to $12.1 billion in cash to pay down further losses and that is without any new stock or prefered stock offerings over and above announced provisions. That gets really scary when faced with the fact that this company only has a market cap of $19.6 billion.

Looking through market related disruption charges, we see the CDO and subprime related charge-downs decreased from the fourth quarter of last year to the first quarter of this year from $818 million to $339 million. Even with this decrease there was an increase in charge-downs with respect to total numbers. The third quarter of 2007 had total net losses of $1.221 billion, the forth quarter of 2007 was $1.5 billion, and first quarter of this year $1.973 billion. These accelerated losses are concerning as they have not yet turned the proverbial corner by lowering their losses. Looking at the type of liquidity they are planning to raise we could still see much larger losses.

One last piece of information: WB has missed earnings due to losses for the last three quarters in a row. The first miss was by 12.6%, the second was by 75.8% and last quarter they missed by 134.1%. With little or no transparency, this one will kill you owning it through earnings.

Disclosure: None

Comments

[Ishortyou:]

Well it looks like things are not getting better, so the government has no choice but to launch an aggressive plan to bump up the demand in the housing market to reduce inventories, either that or we all are going down to the dark ages.

2008 Jul 15 10:31 AM

[mallarde:]

WB lost all credibility. I have ridden this stock down from $30 and do not see a good ending.

Even Steel does not seem to be giving the company enough credibility. He needs to explain how he intends perform surgery on this company.

What else is left but a fire sale to JPM? A sale at $20 would be a huge premium. Even $15 would be a huge premium.

2008 Jul 15 12:55 PM

[User 54645:]

"as it seems improbable they can keep paying a 13% dividend yield with negative EPS"

You can be certain they aren't going to do that, and that the market has factored a large dividend cut into the price, as evidenced by the fact that it's at 13%. Most likely, they will eliminate the dividend altogether, which would be a good move.

You really can't base an assessment of WB on market cap. Market cap has already fallen by $85 billion since last year, and they obviously have not lost that much. The market is simply discounting expected losses into the stock price. All of this bad news is already factored in several times over. If they have a quarter where the loss is less than expected, you could see an uptick in the price.

2008 Jul 15 02:04 PM

[Paul Bishop:]

when is someone going to look at how this all happened? Jeremy Gitt former Merrill Lynch Bank Analyst added to World Board 9/8/05, Wachovia buys GDW ( World's parent) for 1.051 WB shares and $18.75 in cash, $25.5 Billion on 5/8/06 - a mere 8 months later. WB says they are acquiring a "pristine balance sheet", and 238 operating branches and a presence in the West. Herb & Marion Sandler owned 90 million shares each of GDW, 90mm X $58 + 90mm X $18.75= A big number EACH. Who was the Banker for WB in the deal? SURPRISE, Merrill Lynch. June of '07 James Judd former Pres. of World, quietly removed from his job ( first hint of a problem, similar to Enron's Jeff Skilling resigning in Aug. months in front of the implosion) The $125 billion portfolio riddled with sub prime borrowers, all allowed in due to World Underwriters "exception to policy" OUR MONEY OUR RULES- mantra Begins to unwrap. Did anybody look at the escalating NEGATIVE AMORTIZATION amounts on the balance sheet, ( a number that has to be broken out, per GAAP, and indicates the clearest sign that borrowers cannot meet current mortgage obligations. Wachovia's new management has to ask some very serious questions, this Bank was decimated along with it's shareholders. The answers were there, people were complaining, was Wachovia made completely aware of all the issues. $100 Billion in losses later, I think there is more to be told.

2008 Jul 16 01:09 PM

[notsosmart:]

there has to be a better place for investing even in this market?

2008 Jul 16 01:59 PM