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Another Overvalued Bank - Oh My (PRSP)

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August 18, 2008 – Comments (18) | RELATED TICKERS: WFC , JPM , PB

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. 

For example:

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.

18 Comments – Post Your Own

#1) On August 18, 2008 at 10:33 PM, Gingerbreadman55 (25.80) wrote:

Great write-up; I always enjoy a negative writeup that makes me laugh both from the writing and from the lunacy in it.

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#2) On August 18, 2008 at 10:40 PM, dexion10 (27.85) wrote:

gingerbreadman55 - Thanks for checking out my blog.

what is even better about PRSP is that of the 19 analysts that cover PRSP a whopping 17 rate it a "hold" or"sell"....

of course as you know the rating "hold" is wall street speak for sell!

I hope you check out the rest of my blog - I am especially proud of a 4-5 part series I'm doing on nat gas stocks you can see the links here

please check it out if you get a chance 

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#3) On August 19, 2008 at 12:19 AM, Turtleread (67.47) wrote:

Not only are they officers and directors selling, but they are selling practically their entire holdings.  For instance, the Attorney for the Company sold almost his entire holdings of 67,000 shares--that is not a ringing endorsement of the company.  Good analysis.  Happy Hunting!!

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#4) On August 19, 2008 at 6:06 AM, goldminingXpert (29.53) wrote:

nice work!

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#5) On August 19, 2008 at 8:13 AM, dexion10 (27.85) wrote:

Turtleread: yes that is correct good old Anthony sold 76% of his stake in the company (PRSP)

Ned Holmes sold over 25% 

HE Timanus sold over 10% 

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#6) On August 19, 2008 at 10:23 AM, dexion10 (27.85) wrote:

thanks to everyone for reading my blog.

 

Reminder: 

I've also been posting on energy stocks and I'd appreciate it if you reccomend my blog.  

The most important blog commentary I've ever written was titled THE BIG IDEA - How I Value Energy Stocks & Why they ......

I'd like this blog to become one of the most recommended this month so all Fools get a chance to benefit from this seminal post on Energy stocks.

That blog is part of a 4 or 5 part series I am writing on energy stocks. The first three blogs in this series are:

 

1.) Why Cramer is getting you KILLED in nat gas stocks

2.)  THE BIG IDEA - How I Value Energy Stocks & W......

3.)  My Nat Gas Pics - Under-the-radar-names with appe......

Please read and rec all three - thanks and god bless!

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#7) On August 19, 2008 at 12:03 PM, anchak (99.86) wrote:

Good one ...Dex..... All the best!

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#8) On August 19, 2008 at 1:14 PM, Tastylunch (29.36) wrote:

Thanks for the good blog/pitch Dex. Very convincing.

I admit I get lazy and use P/Es sometimes in pitches, but I really shouldn't :-)

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#9) On August 19, 2008 at 1:36 PM, Tastylunch (29.36) wrote:

oh and congrats you created a dogpile which changed the rating of PSRP from a two to a one star.

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#10) On August 19, 2008 at 4:33 PM, dexion10 (27.85) wrote:

Tasty lunch, Anchak, Goldmining Expert -  thanks  a bunch for the comments and recs!

I'm really digging the CAPS community action here! 

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#11) On August 19, 2008 at 5:08 PM, dexion10 (27.85) wrote:

FYI for the record I like PRSP as a short better than my other bank shorts PACW, CPF, WCBO.

The difference is that all those banks are trading below 2x book so it's dangerous to be short if the market wants to pretend the credit crisis is over or if the gov't steps in to prop up the banks - which it will eventually do.

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#12) On August 20, 2008 at 12:51 AM, jegr5347 (< 20) wrote:

What's the way to go here, a straight short or some put options.

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#13) On August 20, 2008 at 2:18 PM, dexion10 (27.85) wrote:

I prefer to be straight up short... rather than options.

The reason I prefer being short the shares is that 

1. I don't perceive takeover risk at this 4.25x book multiplee

2. It's hard to time a valuation call or financials in general 

3. PRSP options are extremely illiquid so their is a big spread on the out of the money options.

That said the options do provide better risk control because you know exactly what your at risk capital is... vs owning the common stock should a buyer offer to buy PRSP at a big premium.

 

As for an entry point.  Ideally I'd want to short it at $33.50 or higher but I'd put on a position all the way down to $31.00

obviously you'd like to see this thing rally on some great financial sector news... but when the buzz wears off this thing will trade on it's own fundamentals.

Best of all since in theory there is nothing wrong with this bank - any gov't fixes should have only marginal implications for them. 

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#14) On August 22, 2008 at 1:01 AM, TheGarcipian (32.86) wrote:

Dex,

Good points, all of 'em (I rec'd your post here). I don't know how to value banks, so it's all a new learning experience for me. I can only define macroeconomic events and see which side of the "wailing line" said bank is likely to be on. If it's too close to call, I just pass. Otherwise, I'll nail a Thumbs-Down on them, like my WM red-thumb pick way back in January 2007, for an 83.8% loss (I've subsequently closed that pick). But if the top execs are bailing with huge sales on PRSP like those described above, that definitely is not a good sign. I'd put PRSP on my WatchList yesterday after I read this, and now that I'm re-reading it  (short-term memory loss is a bitch, ain't it?), I think I might have to add it to my CAPS lineup.

Thanks for the pointers,
--Gar

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#15) On August 22, 2008 at 1:10 AM, TheGarcipian (32.86) wrote:

Oh, I forgot to ask some followup questions: how far down do you think PRSP will fall from here? 10%? 20%? Are you using any sort of valuation model to predict what "fair value" is for this bank stock?

Based on Book Value/Price alone, if what you say is true (namely, a fair value of BV/P is 2.0), and this thing is at 4.25, then this stock could easily be halved, no? But are there other extenuating circumstances that may temper that fall?

Thanks again,
--Gar

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#16) On August 22, 2008 at 12:27 PM, dexion10 (27.85) wrote:

Yes unless PRSP has some really great assets that are way undervalued on the books I think the valuation could be halved from here and still not be cheap.

Again PRSP is in one of the better real estate markets in the country so I DO NOT think they'll have massive issues additionally their  profit margins are very high thanks to the inherrent leverage that banks have.

However it just looks to be priced for perfection and I question if these profit margins are sustainable.

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#17) On August 26, 2008 at 2:07 PM, dexion10 (27.85) wrote:

FYI - my SHORT focused price target for PSRP is around $24.

 

While on paper you can argue for a $16 target (2x tangible book) - I think that  a more appropriate target is $24 (3x tangible book) - which I think gives this bank some credit for being a good bank with growth opps... that said I think 4.25x book isn't indicative of the real value of the bank...as I don't believe a strategic acquirer would pay that much for PSRP especially given the fire sales that are likely to occur in the coming months.

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#18) On January 15, 2010 at 7:01 PM, walt373 (99.86) wrote:

Interesting article on Morningstar about this bank, paints them in a very good light. You might want to check it out before shorting.

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