SNV shares carry at least $3.00 of franchise value today after taking a credit mark of about $850 million of ongoing credit losses through 2011, adding back a deposit premium just under 4%, and using Tier 1 Common (excluding all TARP & Trust Preferred capital). Yes, this figure should build to about $3.30 at the end of 2011 and would be higher in 2012 if the DTA (deferred tax asset) valuation allowance is partially or fully recaptured. But, we think investors are unlikely to pay in advance for this valuation discrepancy. In fact, a present value of franchise value we estimate for year-end 2011 is only $2.88, only modestly above the current trading price. While 3Q10 results showed a slightly reduced loss, we continue to forecast negative EPS results through mid-2011 as the company’s cumulative loan losses trend towards 18% of peak loan balances (i.e., which compares to 14.9% so far the past 15 quarters—including OREO write-downs). While it is possible that loan resolutions are accelerated in the next two quarters (which we would prefer), we still believe true profitability is not until 2H-2011. Thus, we think the stock may continue to trade at a discount to both our future forecast of Franchise Value (see table on Page 4) but also closer to the present value of our future P/E range of 10x to 11x Normalized EPS of $0.32 in 2012. . . . Our rating remains “Market-Perform.” [Emph. added]
Might we review those numbers?
- Our anonymous analyst says that Synovus’s franchise value, assuming ample incremental credit losses through next year, but not including a 88-cent-per-share deferred tax asset the company will almost surely recover once it returns to profitability, is $3.00 per share—or 28% above its stock price at time of publication.
- He says the net present value of Synovus’s projected yearend 2011 franchise value of $3.30—again excluding the DTA—calculated using a highly generous discount rate of 14%, is $2.88 per share—or 23% above its stock price.
- He says the stock should trade at roughly 10.5 times its normalized earnings of 32 cents per share. That works out to $3.36 per share—or 44% higher than its current stock price.
So depending on the calculation you prefer, by the analyst’s own numbers Synovus is undervalued by anywhere from 23% to 44%. And yet our man rates the stock “Market-Perform.” Gggggoink!
I should add, in case you’re suspicious I’m leaving something out, that the company is lavishly capitalized, thanks to a $1 billion equity offering it did in April (that we were none too thrilled with, by the way). At the end of the third quarter, Tier 1 capital stood at 9.5%. Meanwhile, no one disputes that the company’s credit issues are clearly and decisively improving. I say Synovus returns to profitability the first quarter of next year. Our Mystery Analyst says it will be the fourth quarter. Given that the company lately trades at 75% of tangible book, which quarter exactly Synovus starts to make money again seems slightly beside the point. Oh, and the deferred tax asset that our man seems determined to ignore is not immaterial. Assuming that crazily high 14% discount rate that seems to have been plucked out of the air, he notes it would adds 72 cents per share to what the stock should be worth here and now.
Good heavens. One of the few positives for the sell-side to come out of the credit crackup is the opportunity it is lately providing analysts to make valuation calls (and stock recommendations) that are plainly, blindingly obvious. Here is a company, for example, that even according to assumptions that are surely designed to be overly conservative, has upside of 25% to 45%. (According to more realistic assumptions, I can’t help but add, the upside is closer to 100%.) And he is neutral. What more in the world can these people want?
What do you think? Let me know!
(Note: We have a position in Synovus.)