There might not be a more hated stock than Income Investor selection Popular (NYSE: BPOP). Popular, which is better known for its Banco Popular business, has a hold rating according to analyst data on Yahoo! Finance. Hold, as we all know, means sell.
For the quarter, the company reported net income of $118.6 million and earnings per share of $0.41. The company also reported a return on assets of 1.02% and a return on equity of 12.91%. All those numbers represent a slight decline from last year's results, and I wouldn't get too excited about them, because they're filled with a raft of one-time items.
Things at Popular have not gone well, and the company's management is aware of it, but that hasn't made all the pain go away yet. A large dose of that pain comes from the company's subprime lending business. Popular is in the process of exiting this business, but it can't do so quickly enough. In the last quarter, the company recognized restructuring charges it expected from shutting down the unit.
This quarter, Popular recognized expected additional restructuring costs and was forced to recognize a decline in the value of the subprime loans it still holds. To top it off, the company also had to write down the value of its residuals on previously securitized loans. As it turns out, that money might never come in -- not a shock to those paying attention to the subprime lending mess. To further muddy the waters, the company reported a $119 million gain on the sale of an investment in Telecomunicaciones de Puerto Rico. Adding it all up, I'd say the first quarter was about on par with its fourth quarter of 2006, which is to say, not very good.
While it's a pretty drab quarterly earnings release, there was some good news. The company has increased the portion of its funding coming from deposits and decreased its reliance on short-term and long-term debt. Both flavors of debt are more expensive than deposits. The slight negative here is that the company increased its more expensive high-interest-yielding deposits more than it did its non-interest-bearing deposit balances. The company has also begun to see some of the operational cost savings from shutting down its subprime business and consolidating the rest of its business in North America.
Despite all the flaws, Popular is still the dominant banking franchise in Puerto Rico, it isn't ignoring the problems in its business, and it's priced as though it will continue to struggle for another year or more. I don't believe the business is perfect, but I also don't think it is another Doral (NYSE: DRL). The core banking operation and its expansion potential in certain U.S. markets still have value. A management team free of the subprime lending business can focus on improving those operations and getting return on equity back up into the 15% range, which, if it happens, should work out well for investors from here.
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At the time of publication, Nathan Parmelee owned shares in Popular, but had no financial position in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
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