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Flagstar might not be the best to bank your investments on

Tuesday, September 16th, 2014

The dollar has shown signs of strength recently as the world sees our economy improving.

While this seems like a positive movement it could cause difficulties and, perhaps, a slowdown in our economy.

There are two reasons why I’m not in favor of a strong dollar -- and a rapidly improving strong dollar, at that.

The first is that a strong dollar makes our exports more expensive, and if they are more expensive then the world will not buy as many. If the world is not buying as many, then our manufacturing could slow down.

The second reason is that a strong dollar makes imports less expensive, and consumers will buy more imports such as foreign cars that are cheaper than American-built cars or products.

So be careful about wishing for a stronger dollar -- it could slow down our economy and perhaps bring inflation sooner than expected.

*****

One industry that I have not looked at recently is the regional banks. I have favored the large, money-center banks since early 2009. These have performed extremely well and are now much stronger than they were five years ago.

But taking that one step further, I thought maybe I could find some value in the regional banks. One regional bank that came to mind was Flagstar Bancorp Inc. (NYSE: FBC) which has a market cap $994 million.

Over the last year, the stock has traded as low as $13.75 and as high as $22.88. Currently, the stock trades just less than $18 per share. Based in Michigan, the bank was founded in 1987. It has 111 banking centers in Michigan, 39 home loan centers in 19 states and nine wholesale lending offices.

Valuations appear attractive for Flagstar, with a price earnings ratio of 9.8 -- slightly higher than the industry at 8.4 but still attractive under 10.

Price to sales checks in at 1.7, which is below the industry at 1.9. Investors will pay only 91 cents on the dollar for the tangible book value of this bank; compare that with the industry average of 1.4 times.

The industry does have a better price to cash flow at 6.1; however, I feel comfortable with Flagstar’s price to cash flow of 7.8.

Over the past year the bank has experienced some difficulty with sales declining 30.4 percent while the industry was down 1 percent. The bank appears to be on the mend with earnings per share year over year climbing 75 percent when the industry average experienced a decline of 14.3 percent.

The financial strength of the bank is strong, with the debt to equity at 24.9 compared with the high-debt industry of 462.1. Banks as a whole do have highly leveraged balance sheets because they loan money to consumers and businesses.

Return on equity comes in at 9.8 versus the industry at 12.8, which I think we should see rise over the next 12 months for Flagstar Bancorp. Part of the reason for my optimism is a net-profit margin of 20.5, which is attractive even though it is still not quite as good as the industry at 23.2 percent.

Based on the mean by five analysts -- which is slightly fewer than I would like to use -- Flagstar is projected to lose 64 cents per share for the year ending December 2014. Fast-forward to December 2015 and things get far better for the bank, with the average earnings per share coming in at $8.61.

Using a price-earnings multiple of 16.5, this could yield a future stock price of $26.57 for a potential gain of 48 percent.

Please note that there is a wide range with the estimated earnings of December 2015, with the low being a $1.24 and a high of $2.25.

Last quarter, Flagstar beat the estimate by 57 percent. It missed the estimate by 894 percent in the March quarter. The December 2013 estimate it beat by 1,285 percent; in September 2013 it was a mess of 45 percent.

What this tells me is with a wide range of the forward estimates on earnings, the future target sell price may not be as accurate as I would like.

So while it may make sense to add a regional bank into your portfolio, I’m not completely convinced that Flagstar Bancorp would be your best choice. Further analysis could give more valuable information to investors -- or you could try to find a stronger regional bank.


Do you have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com!

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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