A Very Cheap Play on Possible Bank Consolidation

Many of the regional bank stocks had quite a good run in December as investors became more optimistic that 2011 would be a big year for acquisitions and consolidation in the industry. This optimism was fueled in part by Bank of Montreal's (NYSE: BMO  ) acquisition of troubled regional bank Marshall & Ilsley (NYSE: MI  ) that led to a 17.4% increase in the SPDR KBW Regional Banking (NYSE: KRE  ) exchange-traded fund in the month of December.

While I don't believe there is going to be a great deal of premium bank acquisitions in 2011, I do think consolidation will continue in the industry as more banks fail throughout the year. In 2010, 157 banks failed, and though the pace is expected to slow in the coming year, Federal Deposit Insurance Corp. Chairwoman Sheila Bair believes failures will remain at an elevated level. No one likes bank failures, but there is one stock that trades at a very cheap valuation that I believe could help investors profit from these failures if billionaire investor Gerald J. Ford decides to deploy some of his holding company's cash war chest in that direction.

Have cash, will deploy
The holding company, known as Hilltop Holdings (NYSE: HTH  ) , was formerly a mobile home operator called Affordable Residential Communities with a small property and casualty insurance subsidiary based in Texas called NLASCO. In 2007, the mobile home business was sold for $1.8 billion and the company was reorganized as Hilltop Holdings, which includes the insurance business and an extremely large pile of cash for Mr. Ford to reinvest.

The large pile of cash and the talents of Ford managing this cash are what excited me about this stock. The company's most recent quarterly report describes the structure as "a holding company that is endeavoring to make opportunistic acquisitions or effect a business combination. In connection with that strategy, we are identifying and evaluating potential targets on an ongoing basis."

Ford has made a career and billions of dollars investing in and turning around troubled banks. For two decades beginning in 1975, Ford bought distressed banks, mainly taking advantage of the discounts presented as a result of the savings and loan crisis. Ford bought a total of 30 banks and five thrifts, and would sell them for a total of $605 million. However, in 2004 he bought his most profitable turnaround, purchasing First Nationwide Bank for $1.1 billion and bundling this asset with a few other small banks, which he then sold to Citigroup (NYSE: C  ) for $5.3 billion.

Today, Ford is on the prowl again, but this time through his publicly traded investment company, Hilltop Holdings. During the financial crisis, banking regulators attempted to broker a deal that included Ford's private equity group as a potential buyer of Washington Mutual before JPMorgan (NYSE: JPM  ) finally stepped in. While Ford was not involved in a deal for Washington Mutual, he led one of the first private equity firms in 2008 to attempt to gain the ability to buy failed banks from regulators through shelf registration.

Private equity groups have had a difficult time gaining full FDIC guarantees on loan losses for potential acquisitions. However, Ford has decided to invest in troubled banks that are not yet under FDIC control.  In early 2010, Ford's group injected $500 million in troubled California lender Pacific Capital Bancorp (Nasdaq: PCBCD  ) .

While Ford has yet to put any of Hilltop's cash to work on troubled banks, looking at the company's charter and knowing his history, it is hard to imagine that some of this cash is not earmarked for bank turnarounds.

Now about that pile of cash
Not only does the company have a ton of cash, it is also extremely cheap. In fact, its total cash balance of $643 million is larger than its entire market capitalization of $559 million. Hilltop does have $138.35 million in debt, so its net cash total of $505 million does not exceed its market cap, but good luck finding similar valuations in stock land.

The $505 million in net cash and a price/tangible book ratio of 0.9 is a pretty sizable margin of safety for any company, especially one run by someone who has been as successful as Gerald J. Ford. While his investments in 2011 bear watching, I believe investors can expect to see some cash being put to work in the financial sector. If his past success is any indicator, that could be a pretty profitable proposition for investors.

Andrew Bond owns no shares in the companies listed.  The Fool owns shares of Hilltop Holdings, JPMorgan Chase, Pacific Capital Bancorp, and SPDR KBW Regional Banking. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2011, at 10:13 AM, pondee619 wrote:

    From CAPS Income Statement on this co.

    Payment of Cash Dividends (10.31) (10.31) (10.56) (11.42)

    "Dividend Information

    Yield % 0.00

    Annual Dividend 0.00

    Payout Ratio 0.00 "

    Are they paying dividends on preferred shares? If so, would these be the better vehicle? If not, on what are they paying dividends?

  • Report this Comment On January 11, 2011, at 10:39 AM, TMFBond007 wrote:

    Hi pondee619,

    Hilltop was paying about 8.25% on preferred shares, which was definitely a drag on common shareholders.

    However, late last year management made the decision to repurchase all of these outstanding preferred shares. So it is possible that some of this cash goes to the common shareholders.

    Regardless, It should also lower the company's cost of capital, as if Hilltop chooses to borrow to redeem the preferred's it would be at a much lower rate than 8.25%

    AB

    http://www.sec.gov/Archives/edgar/data/876661/00008766611000...

  • Report this Comment On January 22, 2011, at 1:35 AM, caliinvestor wrote:

    Andrew,

    How did you arrive at the $559MM market capitalization figure? My understanding based on PCBCD's press release announcing the effective date of the 1-for-100 reverse stock shows 32.9 million shares outstanding. Using Thursday's 26.94 price would put the market cap at $886 million. Please explain.

  • Report this Comment On January 22, 2011, at 1:37 AM, caliinvestor wrote:

    Andrew,

    How did you arrive at the $559MM market capitalization figure? My understanding based on PCBCD's press release announcing the effective date of the 1-for-100 reverse stock shows 32.9 million shares outstanding. Using Thursday's 26.94 price would put the market cap at $886 million. Please explain.

  • Report this Comment On January 26, 2011, at 3:25 PM, ViolentCapital wrote:

    awesome regurgitation of fool's special situations newsletter

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1420501, ~/Articles/ArticleHandler.aspx, 9/2/2014 12:58:38 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement