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barrons.com
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November '05
The recent hurricanes spared Puerto Rico, but the island's banks have suffered
a nasty gale this year.
Accounting questions at Doral Financial (DRL) and First Bancorp (FBP), along
with concerns about an overheated local mortgage market, have grounded these
once-soaring stocks.
There are value-hunting investors, however, who believe the turmoil has
created a windfall opportunity in Popular (BPOP), parent of the territory's
largest bank.
Let's start by saying that there are some good reasons for Popular's stock
weakness, which has amounted to a 28% decline this year to a recent 21. Net
interest margins are under pressure, there remains doubt about accounting
treatment of some securities holdings and Popular's $300 million purchase of
E-Loan struck a discordant note with some shareholders. What's more, Popular
announced last week it would offer $200 million in new equity to shareholders to
stiffen up its capital standing.
Keefe Bruyette & Woods analyst Bain Slack downgraded the stock to the
equivalent of a Hold when it was at 26 in the summer. He believes there remains
downside risk to his current $1.85 2006 earnings estimate, which already is
below the Street consensus of $1.96. The Puerto Rican government's difficult
fiscal condition is one cause of concern, given that it employs one-third of the
work force, and is adding taxes and pulling various subsidies. This prompts some
upside risk to credit losses, he believes.
That being said, the current share price seems to incorporate a good deal of
bad news, and the risk-reward equation has greatly improved for buyers, even if
the stock hasn't reached an absolute bottom.
Popular, with a market value of $5.5 billion, is a well-managed bank,
achieving high-teens return on equity in recent years and 15% average annual
earnings-per-share growth over the past decade. It also has a unique franchise,
with the largest footprint in Puerto Rico (32% of island deposits) and a major
U.S. presence (136 branches, $20 billion in assets).
In the U.S., Popular is concentrated in heavily Hispanic markets in New York,
Chicago, California, Texas and Florida. This makes the stock a fine way to play
the rapid growth and economic progress of the Hispanic population. Assets are
weighted toward commercial loa
ns, although consumer business has grown and may
grow faster after the E-Loan buy (along with sub-prime lending, for better or
worse).
At about 10.5 times forecast 2006 earnings and with a 3%-plus dividend yield,
Popular shares are at their lowest valuation since early 2000. (Roughly
comparable U.S. regional banks have not gotten back down to their five-year
trough valuations.)
Douglas Hughes of Hughes Investment Management publishes
www.BankNewsletter.com, an advisory letter with a strong record of finding
winning small-bank picks. He went above his usual size range to recommend
Popular shares last week, pointing to the strong management, solid financial
condition and a history of insider share buying at higher prices.
The successful value shop Ariel Capital has acquired 13 million Popular shares
this year, nearly a 5% stake. Jason Tyler, an Ariel analyst, says they began
buying after gaining confidence about its franchise quality and the minor likely
effect of any accounting issue. Taking a long-term approach, Tyler says Ariel
calculates Popular's intrinsic value to be in the high 20s per share. And that
intrinsic value ought to grow nicely over time.
Douglas Hughes
President
BankNewsletter.com
1-888-814-7575
Hughes Investment Management
As always, you may call me with any questions on any stock. This
is a free service to our subscribers.
To contact Douglas Hughes via email - dhughes33@charter.net
Pe
rsonal Account Management: Bank Stock Portfolios.1.25%-1.75% FEE.
$500,000 Minimum. Douglas Hughes Hughes Investment Management,
A Registered Investment Adviser 1-888-814-7575.
The Small Bank Newsletter is published 12 times a year. (To
Subscribe: 1-888-814-7575).
- Douglas Hughes -- Small Bank Newsletter, Hughes Investment Management
, can and does take positions, in stocks it recommends.All material
Copyright© 1995-2005 by Douglas Hughes. Reproduction of this
publication in whole or in part is strictly forbidden.
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