The Best Companies of the Banking Industry – October 2015

A Glimpse at the Bank Industry (1)While ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself. With that in mind, this article will take a brief look at the best companies of the banking industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 560 companies reviewed by ModernGraham, 19 were identified as being closely related to the banking industry. Of those, five are suitable for the Defensive Investor, nine are suitable for the Enterprising Investor, and the remaining five are considered speculative at this time. Excluding any extreme outliers, the average company was rated as being priced at 47.85% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 18.5. The industry as a whole, therefore would appear to be undervalued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

BB&T Corporation (BBT)

BB&T Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, while the Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.72 in 2011 to an estimated $2.48 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.80% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Citigroup Inc (C)

Citigroup Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, as well as the inconsistent dividend record. The Enterprising Investor has no initial concerns As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $6.47 in 2011 to an estimated gain of $3.80 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.43% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Comerica Incorporated (CMA)

Comerica Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor has concerns regarding the insufficient earnings stability or growth over the last ten years while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.24 in 2011 to an estimated $2.60 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.94% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Fifth Third Bancorp (FITB)

Fifth Third Bancorp qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor has concerns regarding the insufficient earnings stability over the last ten years while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.30 in 2011 to an estimated $1.66 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.39% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Huntington Bancshares Incorporated (HBAN)

Huntington Bancshares qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor has concerns regarding the insufficient earnings growth or stability over the last ten years while the Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $1.02 in 2011 to an estimated gain of $0.75 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.85% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

JPMorgan Chase & Co. (JPM)

JPMorgan Chase & Co. qualifies for both the Defensive Investor and the Enterprising Investor. The company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong fundamentals. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $3.47 in 2011 to an estimated $5.15 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.83% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

KeyCorp (KEY)

KeyCorp qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $0.35 in 2011 to an estimated gain of $0.99 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.73% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

M&T Bank Corporation (MTB)

M&T Bank Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $5.28 in 2011 to an estimated $7.43 for 2015. This level of demonstrated earnings growth supports the market’s implied estimate of 3.66% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price. (See the full valuation)

People’s United Financial, Inc. (PBCT)

People’s United Financial Inc. is suitable for either the Defensive Investor or the Enterprising Investor. The company passes all of the requirements of both investor types, a rare accomplishment indicative of the strong fundamentals. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.40 in 2011 to an estimated $0.78 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.44% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

PNC Financial Services Group Inc (PNC)

PNC Financial Services Group Inc. qualifies for both the Defensive Investor and the Enterprising Investor. The company passes all of the requirements of both investor types, an accomplishment indicative of strong financial strength and stability. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.90 in 2011 to an estimated $6.91 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.73% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

State Street Corp (STT)

State Street Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years as well as the high PEmg ratio. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.03 in 2011 to an estimated $3.57 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.1% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

Starwood Property Trust, Inc. (STWD)

Starwood Property Trust Inc. qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor is concerned by the short history as a publicly traded company, while the company passes all of the Enterprising Investor’s requirements. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.

As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $0.76 in 2011 to an estimated $1.98 for 2015. This level of demonstrated growth is greater than the market’s implied estimate of 1.18% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price. (See the full valuation)

U.S. Bancorp (USB)

US Bancorp qualifies for both the Defensive Investor and the Enterprising Investor. Neither investor type has any initial concerns. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.

As for a valuation, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.85 in 2011 to an estimated $3.01 for 2015. This level of demonstrated growth is greater than the market’s implied estimate of 3.26% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price. (See the full valuation)

Wells Fargo & Co (WFC)

Wells Fargo & Co. qualifies for either the Defensive Investor or the Enterprising Investor. The company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial statements. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the next stage of the analysis.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.13 in 2011 to an estimated $3.86 for 2015. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.36% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price. (See the full valuation)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

No companies met this criteria.

The Full List

 

To view the MG Value and PEmg information, you must be logged in as a premium member. Clicking on the company name will take you to the company’s latest valuation.

For the investor type, a “D” indicates the company is suitable for the Defensive Investor, an “E” indicates the company is suitable for the Enterprising Investor, and an “S” indicates the company is considered speculative at this time.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
BAC Bank of America Corp S 1/24/2015 $15.90 1.26%
BBT BB&T Corporation E 8/14/2015 $36.28 2.98%
C Citigroup Inc E 9/1/2015 $51.81 0.39%
CMA Comerica Incorporated E 10/21/2015 $41.52 2.02%
FITB Fifth Third Bancorp E 10/2/2015 $18.28 2.84%
HBAN Huntington Bancshares Incorporated E 10/1/2015 $10.62 2.26%
HCBK Hudson City Bancorp, Inc. S 4/7/2015 $9.57 1.67%
JPM JPMorgan Chase & Co. D 9/3/2015 $62.06 2.84%
KEY KeyCorp E 8/23/2015 $13.04 2.30%
MTB M&T Bank Corporation E 8/24/2015 $115.17 2.43%
PBCT People’s United Financial, Inc. D 8/24/2015 $15.90 4.21%
PNC PNC Financial Services Group Inc D 8/13/2015 $87.58 2.33%
RF Regions Financial Corp S 1/27/2015 $9.03 2.66%
STI SunTrust Banks, Inc. S 11/11/2014 $40.23 2.39%
STT State Street Corp E 8/22/2015 $67.19 2.02%
STWD Starwood Property Trust, Inc. E 7/26/2015 $20.60 9.32%
USB U.S. Bancorp D 8/6/2015 $41.10 2.48%
WFC Wells Fargo & Co D 9/1/2015 $53.12 2.82%
ZION Zions Bancorporation S 2/17/2015 $27.52 0.87%

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice and all readers are encouraged to speak to a registered investment adviser prior to making any investing decisions. Please also read our full disclaimer.