Stocks that I am watching for the coming week:
Electronic Arts (ERTS) announces earnings tomorrow after the bell. The stock has dropped to its 52 week low price of $14.66. I will be interested to see what the company’s earnings were for the past quarter. I still think that the EA franchise has value and if the shares stay around this level; it may be a buying opportunity.
General Electric (GE) set a new 52 week low today at $11.51. I have been accumulating GE shares at $11.87 and below recently. I know that GE Finance is 40% of GE’s earnings and that they are divesting themselves of some of their businesses. But I have a hard time seeing GE as a $12 stock 5 or 10 years from now. I am getting more concerned about the dividend as the stock drops. The shares either need to rise back to $15 or the dividend is gone. A 10% yield just cannot last.
There is a lot of talk about Wells Fargo (WFC) needing to slash its dividend. I honestly don’t know if this is true or not. Banks have such convoluted financial statements and so many off the balance sheet items that they make evaluating their financial position difficult. I have been disappointed by bank stocks before so it wouldn’t shock me. Wells remains a stock that I continue to buy for the long term.
Dow Chemical(DOW) hit the $10 level today. The stock dropped to$10.95. Tomorrow is probably the day when Dow will announce at least a 50% dividend cut. Dow is expected to announce earnings between 6 and 7 cents a share. This cannot support a dividend of $1.68 with a 14.5% yield. An interesting side note is that Dow Chemical has a market cap of 10 billion dollars. If Dow is forced to buy Rohm & Haas at the 15.3 billion dollar price, Dow will be buying a company that is worth 50% more than Dow. This deal would potentially bankrupt Dow.
Finance
DOW, ERTS, GE, WFC
I am trying out a rather risky investment thesis by investing in financial stocks. I have begun to start building a position in the major financial stocks. I believe that the last few weeks have presented some good buying opportunities for financials. The three financial stocks that I have invested in are Wells Fargo, JP Morgan and Bank of America.
Wells Fargo is probably the best capitalized of the major banks. The recent addition of Wachovia has given Wells Fargo about 800 billion in deposits. Wells Fargo size is a major competitive advantage. They have a Tier 1 capital ratio and a solid balance sheet. Wells is currently the 2nd largest bank in the US in terms of market cap. Wells also has excellent management. Wells Fargo management have already accounted for a 74 billion dollar writedown of Wachovia’s total loan portfolio. This should reduce Wells exposure going forward. Wells stock has held up pretty well over the last few months compared to its peers. Wells has historically had a 22% profit margin and solid ROE of 18% over the last five years. It doesn’t hurt that Warren Buffett loves Wells Fargo and has owned it for years.
JP Morgan Chase should emerge from the financial crisis as the dominant player in the banking industry. JP Morgan got a steal with the acquisitions of Washington Mutual and Bear Stearns for well below their true value. JP Morgan has the largest deposit base of any bank in the country which gives it a strong capital base. JPM has solid management that has delivered an 18% profit margin over the past 5 years. The return on equity averaged 10.5%. I think this will increase in the future as Jamie Dimon and company realize the synergies of the Washington Mutual acquisition. JP Morgan currently sells well below its book value and pays a healthy dividend.
Bank of America is definitely the riskiest of the 3 banks. From its purchase of Countrywide just before the subprime crisis to its pending merger with Merrill Lynch, Bank of America has made some questionable moves. The Countrywide and Merrill Lynch deals that appeared cheap before now look severely overvalued. Bank of America’s shares have plummeted and this may provide an opportunity. The stock was selling for $10 recently which is well below its book value. Bank of America has historically averaged a 16% ROE and a 27% profit margin. I think that the Bank of America name is a major competitive advantage. Bank of America has a huge deposit base and the BOA name has significant goodwill. I think the Merrill Lynch acquisition will be a valuable brand for Bank of America long term. But I am not so sure about the Countrywide acquisition. Countrywide has a damaged brand name due to its heavy association with the subprime crisis. However, I do think with their ability to access capital and their strong brand name Bank of America will remain a viable entity.
These 3 stocks will probably continue to face difficult circumstances in 2009. I do think that over the long term these banks will benefit from the financial crisis and emerge with even greater market share and a stronger financial structure.
Investing
BAC, banking, Bear Stearns, Countrywide, financial, JPM, WFC
I was thinking recently about the failed Citigroup Wachovia deal. As a Wells Fargo stockholder, I was in favor of the Wachovia deal because of the large deposit base that Wells is picking up. The merger will give Wells Fargo a major presence on the East Coast and should increase earnings in the future. But I can’t help thinking, what would have happened if Citigroup had gotten Wachovia?
Citigroup’s merger with Wachovia would have given Citi a deposit base of 600 billion dollars. Citigroup would have only had to assume the first 42 billion dollars in losses with the government backstopping any additional losses. But I still am not sure if this would have been enough for Citi to stand alone without additional capital injections. Citigroup still has over 1 trillion dollars in off balance sheet assets that have not yet been written down. I think that the government would have had to pay substantially more to backstop the losses of a Cit Wachovia deal.
Wells probably has the strongest balance sheet of all of the major banks. Their balance sheet should be strong enough to absorb additional losses from Wachovia’s Golden West mortgage portfolio. I am not sure that Citigroup could have handled any losses related to Wachovia’s shaky mortgage portfolio. I think that this is only the beginning of Citi going to the government for fresh capital. This will only further dilute shareholders. I can only wonder if a merger with Wachovia would have kept Citi from its freefall or accelerated the process.
Investing
C, Citigroup, merger, Wachovia, Wells, WFC
Citigroup announced that they would be laying off 53,000 workers yesterday. Citigroup has already laid off 23,000 employees earlier this year. Citi has lost 20 billion dollars over the past year and has had four straight quarterly earning losses. Citigroup is on its third CEO in the last year. Citigroup has watched its stock price decline to $8.00 per share and its market cap has shrank to 43 billion. Citigroup is also facing mounting losses from its mortgage, credit card portfolio and will likely need to raise additional capital. Citigroup is trying to return to profitability by selling off assets and implementing a number of cost cutting initiatives. This strategy will help Citigroup in the near term. But it does not solve the long term issues that plague Citigroup.
Beginning with the ill fated acquisition of the Travelers Group, Citigroup has struggled since the late 90’s to find its niche in the banking industry. Citigroup grew to prominence by making large acquisitions and through aggressive cost cutting. These tactics allowed Citigroup to flourish in the 90’s. The problem with relying on these methods to fuel growth is that eventually you run out of major acquisitions to make and costs can only be reduced for so long. This is the problem for Citigroup. They don’t seem to be exactly sure what kind of business they are. They have been trying to redefine their business model for the past 10 years. Is Citigroup’s main business consumer banking, investment banking, insurance or as a credit card issuer? Is Citi more focused on international growth or increasing their domestic presence in US banking? Can Citigroup be a smaller player and still survive among the banking giants?
Citigroup is now trying to find its place in the new financial landscape. Citigroup faces a much more challenging environment with Bank of America, JP Morgan, Wells Fargo and US Bancorp all aiming to become larger players in the diversified financial services industry. The failed merger with Wachovia would have helped Citigroup by significantly increasing their number of branches in the US. It would have also given them a foothold in the southeast region of the US. However, it would not have addressed the larger problem at Citigroup of no organic growth. Citigroup’s main focus should be on increasing profitability through organic growth and not acquisitions. Citigroup needs to maximize the earnings in the businesses that they already own.
Citigroup currently pays a dividend of 64 cents per share which amounts to a 6.7% yield. The dividend does not appear sustainable based upon the company’s weak balance sheet and deteriorating loan portfolio. Will Citigroup survive? Definitely. Citigroup is a company that has been deemed too big to fail. The Federal Government’s 25 billion dollar cash injection makes that a certainty. Citigroup will survive but the days of Citigroup as a thriving company in the financial services industry may be a distant memory.
Investing
BAC, bankruptcy, C, Citigroup, JPM, WFC
