PNC and BAC TARP WarrantsA friend of mine shares his True Wealth Systems newsletter (Stansberry). Without divulging the entire content (the subject of a previous post from Travis with which I agree), they basically recommend PNC and BAC TARP warrants. I know Travis previously recommended PNC’s.
I notice that the newsletter bases its recommendation on a P/B value ranging from a low of 1.20 to a high of 1.95, with a ”base” (I’m assuming that means average) of 1.62.
However, when I research historical data on this, I find a range of 0.7017 to a high of 1.366, with a ”base” of 0.9628 (See, http://ycharts.com/companies/PNC/price_to_book_value). These, of course, give a very different outlook on the value of these warrants.
I was wondering if anyone could enlighten me here. Do you have any idea which figures are right? Also, how do they figure the potential value of the warrants based on the P/B value?
Also, can anyone enlighten me as to how these guys get the second of these tables, please (sorry about the outlay)?
Here are the full details…
P/Book
Stock Underperform Base case Outperform
Wells Fargo 1.81 1.82 2.19
PNC Financial 1.20 1.62 1.95
JPMorgan Chase 1.14 1.18 1.41
Hartford Financial 1.00 1.31 1.57
Lincoln National 1.23 1.13 1.36
http://www.stansberryresearch.com
That’s why we’re selling most of these warrants today. When you combine ”full value” with lower growth expectations (compared with two years ago), you see that our upside is limited. Take a look…
Return Through Expiration
Stock Underperform Base case Outperform
Wells Fargo -58% -20% 78%
PNC Financial -38% 193% 394%
JPMorgan Chase -24% 38% 171%
Hartford Financial -58% 27% 105%
Lincoln National -24% -14% 50%
http://www.stansberryresearch.com
Thanks a bunch from a newbie who feels somewhat lost at sea.
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I still own PNC Warrants, as well as JP Morgan and BPFH warrants. The general argument from them is that the stocks will revert to some past average price/book valuation — and that in the meantime, the book value will also be growing. The combination of those two things should make the stock price equal $X, which would make the warrants worth $X for their projected possible range of returns.
It may be that financial firms won’t return to the average price/book valuations they’ve traded at over the past decade — the business has, to some degree, been forever changed by the financial crisis. But I suspect that the good banks will improve with rising interest rates (rising rates will give them an opportunity for better net interest margins — lending at higher rates than they pay depositors), and they are generally very lean and well-run now. PNC is my favorite because it’s been well-run throughout, it arguably might not have even needed the TARP bailout, and they have some very valuable assets (they own a big chunk of Blackrock) in addition to a solid banking business that has consistently done well.
Here’s how I look at the warrants: I don’t see PNC returning to 1.5-2X book value, or at least I’m not counting on it, but I think they can get a slightly richer valuation and keep growing earnings as the economic backdrop improves for them. The PNC Warrants have a strike price of about $68 and the shares are currently at $88. The warrants are at $25 or so, so that means the stock needs to get to $93 for the warrants to be a profitable pick ($68 plus $25). That’s about a 6% gain in four years, or 1.5% a year on average. So anything above that makes the warrants profitable, anything below that makes them lose money and could make the common stock a better buy (particularly because the common stock gets the dividend — the dividend adjustment has not yet hit the warrants, I don’t think, and it’s only really dividend growth impact that you would get from the warrant adjustments, not the full dividend). To me it’s just simply very good leverage on a very strong and not expensive bank stock, without paying much at all for the leverage. For comparison’s sake, you could also buy a January 2017 option contract for close to the price you’d pay for the December 2018 warrant — Jan 2017 LEAPs at a $70 strike price are about $20. The market doesn’t place much value on those two extra years of time for the warrants right now, but I do.
The disparity in book value numbers for YCharts (which I also use) and Stansberry or whoever that data is from could be that they’re not just looking at the reported book value, they could be either using slightly different time periods or looking at tangible (or otherwise adjusted) book instead of book.
Re: PNC and BAC A Warrants
Thanks Travis. Much appreciated. Any opinion you care to offer on the BAC A Warrants?
I don’t have one, the company is more of a black box to me than the others so I’ve not looked in detail at the BAC.WT.A stuff.
As in most investing, timing can be paramount! I took positions in the following:
WFC.WS up 29.38% since 2/14
COF>WS up 39.76% ” ”
AIG>WS dwn 5.73% since 9/14
KMI.WS ” 13.82% ” ”
JPM.WS ” 1.38% ” ”
All as of 11/12/14
Sure wish would have taken the punge back in 2009!
There’s a lot of that going on — if you’re a long-term investor, you need only review the stocks you bought back in 2009 to reassure yourself about how smart you are. A nice affirmation 🙂
The warrants, of course, are all about time — how much is time worth, and what will the future hold? Long-term warrants (more than 2-3 years, beyond the reach of even the longest LEAP options) are so rare and unusual, particularly for “real” companies who make money and have established businesses (not exploration-stage miners, who are often funded with warrants), that I think most investors discount them too much.