One to Bank On

07/14/2006 12:00 am EST


Doug Hughes


Douglas Hughes and I both like bank stocks. Over the years, we have focused on little-known banks that have all the fundamentals in place: Growing revenues and earnings, nice interest rate spreads, and low expenses. And often, additional icing on the cake is their takeover potential. Here, Douglas writes of a bank that he believes may just be ripe for the picking…


Park National Corp. (PRK ASE) is a bank holding company, headquartered in Newark, Ohio. The company is a commercial banking and trust business with more than 1,800 employees and 133 branch offices. As of March 31, 2006, the bank has total assets over $5.4 billion, loans of more than $3.2 billion, and deposits over $3.7 billon.


“The company’s stock has been selling off and is currently near the low for the year, something we like. There is no news, just a big sell-off in the shares. While they may have been over-valued at $140, at current prices, they are a buy. The company’s book value is almost $40.00 a share and with net interest margins at 4.37% and a return on average assets at 1.78%—both very strong—they are simply worth three times book+ in a deal.


“Insiders own a large block of shares. The bank is estimated to earn $7.00 in 2007, so a P/E of 13 is very fair for the quality of the franchise. The bank has been around for 100 years, their asset quality is among the best and reserves at over 2.10% are very strong. The big cash dividend is also nice. Growth seems to be the issue on this one, so maybe they will sell the bank sooner than later. We see tremendous consolidation in the industry in the next few years and Park National has a footprint someone would want. Plus management is very frank about working for shareholders, period.


“The bank has only 14 million shares outstanding but it trades regularly. Just use limit prices, please, on down days. It does follow the market somewhat. Even just a buyback or a stock/split would move this stock back over $105 in a few days. Look for a 10% return for many years to come from these levels, or 30%+ the day the bank is sold. Buy all you can under $90.00 and accumulate now heavily under $93.50.”

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