An Undervalued Bank
11/24/2006 12:00 am EST
Many banks look alike, but banking expert Douglas Hughes is known for uncovering unique opportunities in banks not generally known to the investing public. Here, he recommends a large financial institution trading at a nice discount.
"Union Bancal Corp (UB NYSE) is the holding company for Union Bank California, serving California with over 315 branches and over $50 billion in assets. The company was founded in 1864 and operates as a subsidiary of Bank of Tokyo-Mitsubishi UFJ, ltd which owns about 65% of the shares.
"This is the largest bank we have ever covered other than BNS in Canada, three years ago. We know how that one has turned out; up 300%. With UB trading at multi-year lows when most California banks are at or near multi-year highs, currently fetching over three times book on average in a merger, we had to take a look.
"The bank has over 10,000 employees, many of whom have over ten years each with the company. Union continues to buy back stock and hopefully they will get very aggressive with this the rest of the year. It certainly has the capital and has paid much higher prices in the past. We look for Union to buy 5-10% of the stock back this year and next. Almost every analyst has downgraded this stock the past month; we say buy now. Union is in some of the best markets, loans are growing at 12%+, and non-performing assets are very low at 0.09%.
"Most importantly, Union is being very careful in the California real estate so as not to repeat past mistakes. Home loans are generally made, on average, to 60% of value. This is a liquid stock with good trading volume. Make this one 10% of your holdings at $57.25 or less and 20% at $55.25 or less.
"This is a steal. It may take several years to pan out, but with real estate at bubble prices, perhaps Union will do a sale /lease back of some of its main locations, freeing up more cash to buy back more stock or to do prudent deals next year, as opportunities arise. Who cares if it earns $4.50 or $4.30 next year, this is simply an undervalued franchise at today's prices. Net interest margin at 4.27 and reserves for non-performing loans are strong at 1.39%. Union has a $30.00+ book value and 140 million shares outstanding. Look for $75 a share 2-3 years out, with a cash dividend of 3.3% while we wait. Downside should be limited to around $55 in a big sell."