| Fifth
Third Bancorp (FITB) Looks like a Bargain |
Published: March 15, 2006
When searching for undervalued
stocks, my staff and I are always on the lookout for solid companies
that are suffering from temporary concerns. In the short term, the
shares of such firms can get weighed down by negative investor
sentiment. However, patient investors will eventually be rewarded when
those near-term problems get resolved.
One company that fits this
description well at the moment is Fifth Third Bancorp (FITB).
Fifth Third is a regional bank that operates a network of over 1,100
branches, mostly in the Midwest. It has also gained a foothold in the
fast-growing Florida market thanks to the recent acquisition of First
National Bankshares of Florida.
The company offers consumer
banking, commercial lending, investment management, and other
traditional services. Aside from its core banking activities, the firm's
electronic payment processing division has been a reliable growth
driver, producing revenue growth of +18% over the past year.
Shares of FITB have lost more than one-third of their value over the
past two years, as the company has struggled to cope with a challenging
operating environment. To counter the threat of rising interest rates,
management has been forced to sell off a large chunk of its investment
portfolio. Furthermore, a flattening of the yield curve has compressed
net interest margins (the spread between what a bank earns on its
investments and what it pays to depositors).
While these problems have kept earnings in check lately, neither is a
permanent concern. The asset sales have helped FITB restructure its
balance sheet and have improved the company's risk profile, and the
yield curve should return to a more normal distribution over time. Until
then, the company's low cost structure will help it remain profitable
even in the leanest of times.
Fifth Third also boasts a well-rounded mix of interest and non-interest
income, an above-normal efficiency ratio, strong credit quality, and
improved deposit growth. And thanks to the recent drop in the shares,
investors can now lock in a 4.0% dividend yield.
In short, this undervalued
stock should deliver attractive total returns in the years ahead.
Good investing!
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy
founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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