Thursday, November 15, 2007

Why some financials are attractive now

IS IT TIME TO CONSIDER THEM FOR THE LONG TERM 401K, DESPITE EVERYTHING?

Take Citibank. Can we guess how low "low" is?

Without double-checking the data, here's a quick calculation:

It's worth $25/share, based on it's "book value".

There are about 5 billion shares issued.

Suppose they take even $15 billion more in write-downs (20% of a $70 billion exposure, say). That would be $3 per share, which would bring "book value" down to $22/share. Bear in mind also that they have already done about $10 billion ... (I don't know if that is in the $25/share figure, however).

If you don't believe that their business is changing dramatically because of all this, you can slap a 1.5 multiple on that, which isn't too aggressive for a big bank. That would equate to a $33/share stock.

Last year, the company made over $5 billion a quarter.

Even if they used all of that to pay for write-downs, handled a significant growth slowdown (trim even up to 25% of earnings or $5 billion), and covered the dividend (just under $10 billion per annum), it would seem they have earnings power to avoid going into massive negative quarters, while you hold their stock.

You end up with a flat-ish stock, based around $33/share that pays a whopping 6% in dividends, at current prices (about $34.-$35). At the end of that period, valuation could go up to old levels, giving a huge gain.

This may be why superior, value folks, like Bill Miller, are interested in the long-term potential of the major bank stocks.

The risks are that they have other big problems develop. Maybe some charge-offs in the credit-card business, in buyout-loans, or plain mortgaged-backed bonds. They also appear to be paying a price already in the borrowing markets, but that will just pinch their slightly and slowly earnings, which we've already accounted for, and could easily reverse with proper attention.

[BE SURE to do your own calculations, checks, and make your own decisions about what to own or not ... If you don't, just got to, say, Scottrade.com and just-do-it.]

Update: The bulk of the charges are not in the $25/share figure, as of this press release. The other important consideration is that these charges should be considered after-tax. Therefore, the net change is not much: subtract $7B for the charges already announced and add $5.5B for tax considerations, for a net of $1.5B, or about $0.31/share, which, in turns, lowers the $33 figure to $32.50, which is a point statistic, but probably near a lower bound.

Here's a quick summary:

7 Billion after-tax announced
9.5 Billion after-tax to go ($15 Billion pre-tax)
10 Billion in dividend payment for 2008
===
26.5 Billion needed
15 Billion in net earnings for 2008, assuming 25% slowdown
===
10.5 Billion hit to equity or about $2/share

$23/shr approx equal to $33 stock price, conservative calculation (but not super pessimistic).

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