Another Overvalued Bank - Oh My (PRSP)
I'm very excited to add a texas bank - Prosperity Bankshares (PRSP) to my list of regional bank shorts. I found this because the insiders just sold $3.3M in stock.
What I like most about shorting PRSP is that even if we didn't have a credit crisis and housing bouble I would still short this bank on valuation alone... I can't see any upside. Normally I'd worry about some stupid bank acquiring a bank that I am short... but in this case I can't fatham any potential buyer paying 4.25x book!
Before I tear this bank to shreads let me give you a four key facts. :
Four Key Facts
1. This is a $31.00 / $1.5B market cap bank (remember this tiny number)
2. Goodwill - $800M (goodwill is an accounting term for overpaying for acquisitions)
3. Construction Loans $600M (360M in land)
4. Multiple to tangible book = 4.25x ($7.90 tangible book per share)
CONCLUSION: This bank's goodwill and construction loans are equal to it's entire market cap - they are 2x book. I am repulsed!
This bank trades at 4.25x tangible book value at a time when most banks are lucky to trade at 2x to 2.5x
PRSP has $830M in goodwill (likely related to overpaying for previous acquisitions)
Further the bank has over 600M in construction loans. They have nearly $360M loaned out on land deals of one form or another. Remember this is only a $1.5B bank
At June 30, 2008, construction loans totaled $658.669 million, consisting of approximately $225 million of single family residence construction; $130 million of land development; $135 million of raw land; $100 million of lot loans; and $69 million of commercial construction and other construction loans.
RECAP - FOOL SCHOOL - HOW I VALUE BANKS
I've noticed many people posting and pitching on CAPS often reference a banks PE in their posts. I wanted to share some thoughts that may help the CAPS community. BANKS DO NOT TRADE ON PE'S.... THEY TRADE ON BOOK VALUES
A rule of thumb is that a good bank should trade at 2x its book value provided its book of loans and assets is viewed as :solid"
If a bank is trading above 2x book then you'll generally want to find some hidden undervalued assets that aren't properly valued on the book. If you can find them that might explain the high book multiple.
Vally National Bank in NYC (VLY) trades at 2.6x book. The bank is a very well run conservative bank AND it owns it's building locations in NYC and they have for years... these real estate assets are VERY undervalued and so you can undertand the above avg. book value.