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Is Deutsche Bank A Disaster Or A Great Value Investment?

|Includes: Deutsche Bank AG (DB)

Over the years value investors like Warren Buffett have made a lot of money by buying into basically sound companies that are in a lot of trouble. Many people are probably wondering if Deutsche Bank (NYSE: DB) fits that criteria.

The German financial institution has been making news for all the wrong reasons in recent months. Its U.S. division failed the Federal Reserve's "stress test" for major banks over the summer. More recently some hedge funds' decision not to buy Deutsche Bank's securities have sent its stock price tumbling.

Despite that a lot of investors are looking at Deutsche Bank because it has some similarities to two of the U.S. monster banks that Warren Buffett likes; Wells Fargo (NYSE: WFC) and Bank of America of (NYSE:BAC).

How Deutsche Bank is like some Buffett Investments

Like BOA, Deutsche Bank is very cheap it was trading at $13.52 a share on October 5, 2016. Shares of BAC were trading for $16.15 on the same day. Also like Bank of America, Deutsche bank has suffered a serious drop in revenue in recent years. BOA's revenue dropped from $87.33 billion in June 2014 to $82.8 billion in June 2015, to $80.09 billion in June 2016.

Deutsche Bank's revenue fell from $42.05 billion in June 2015 to $32.66 billion in June 2016. That made for a revenue collapse of $9.39 billion in just 12 months which is pretty bad. Yet the revenue drop has not scared Uncle Warren away from BAC.

Wells Fargo has been racked by scandal much like Deutsche Bank. For those of you who have been hiding under a rock, Wells Fargo has been accused of illegally opening phantom accounts for customers, while Deutsche faces $14 billion fines for shenanigans during the mortgage mania before 2007.

So Deutsche Bank has some similarities to Buffett favorites, but it is a value investment. For that we might take a look at the balance sheets.

Deutsche Bank has a lot of Money

Deutsche Bank is certainly worth a look by value investors; because it had a lot of cash on June 30, 2016. It reported some impressive financial numbers for second quarter 2016 including:

· A free cash flow of $15.23 billion.

· $2.06 trillion in assets.

· $103.9 billion in cash from operations

· $149.29 billion in cash and short term investments.

Okay there were some really ugly numbers there as well including a net income of -$8.764 billion and liabilities of $1.92 trillion. Also scary was the profit margin of .24%.

Like the U.S. monster banks; Deutsche Bank has a lot of money in spite of its problems. It still generates a lot of cash and has quite a bit of float. That makes it much like Wells Fargo which reported assets of $1.889 trillion, cash and short-term investments of $20.41 billion, $137.5 billion in cash from operations and $11.84 billion cash from operations on June 30, 2016.

There is also a passing similarity to Bank of America which reported assets of $2.187 trillion, cash and short-term investments of $178.76 billion, $6.208 billion in cash from financing and $56.95 billion in cash from operations at the end of second quarter 2016. Like BOA and WFC, Deutsche Bank has a lot of cash and float but is it a value trap?

Why Deutsche Bank is not a Good Investment

A value trap is a stock that looks like a classic value investment but really is not. Deutsche is not a value trap, but it is not a very good investment for a few reasons that I will explain right now.

First Deutsche Bank, unlike the other banks is losing money right now, a lot of it. It reported a negative net income of -$8.764 billion on June 30, 2016. Wells Fargo reported a net income of $22.39 billion and Bank of America reported a net income of $14.57 billion on the same day.

Another strike against Deutsche Bank is the lack of a dividend. The bank did not pay a dividend this year or last year Wells Fargo investors can expect a dividend yield of 3.45% and holders of BAC expected a dividend yield of 1.44%.

Finally, I think Deutsche Bank is far too exposed to Europe; it is that continent's largest investment bank. Europe's economy was a mess before the Brexit catastrophe, now it is a basket case with negative rates of economic growth. I don't expect that to change any time soon and to get worse; especially if there are more ISIS terrorist attacks.

All that makes Deutsche Bank a far greater risk than the U.S. monster banks are. If you are looking for a cheap bank stock, check out Bank of America and steer clear of Deutsche Bank because it will lose money. A better way to profit from DB's demise will be to invest in larger U.S. banks like JPMorgan Chase (NYSE: JPM); which are well positioned to feed off Deutsche Bank's carcass and absorb its American operations.

Disclosure: Your friendly neighborhood blogger owns a few shares of BAC.

Disclosure: I am/we are long BAC.