Is This Bank Cheap According to Graham?

I recently spent some time dissecting The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.

However, a quick check can help determine whether or not a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I screened the stocks of the S&P 500 that met those requirements and was presented with 56 companies. I will be making a CAPScall on most of these companies after comparing them to competitors and their current value in relation to their Graham numbers. Up next is money center bank PNC Financial (NYSE: PNC  ) .

Who are they?
Pittsburgh-based PNC Financial is a wide-reaching financial services company. It offers retail banking to over 5 million customers in 16 states and Washington, DC. It also provides lending to "middle market companies," checking in as the second-largest syndicator of middle market loans in the country. It has a mortgage loan portfolio in excess of $130 billion, and also owns approximately one-quarter of BlackRock, one of the largest publicly traded investment management firms in the country. PNC serves its customers as a "one-stop" shop for their banking needs.

What's it worth?
When compared to other financial companies of similar market cap, it has the third most room to grow, behind Capital One Financial (NYSE: COF  ) and previously profiled Bank of New York Mellon (NYSE: BK  ) :

Company

EPS (TTM)

Book Value Per Share (MRG)

Graham Number

Recent Price

PNC Financial $5.64 $61.51 $88.35 $63.00
US Bancorp (NYSE: USB  ) $2.46 $16.42 $30.15 $31.68
Capital One Financial $6.80 $65.18 $99.86 $53.63
Bank of New York Mellon $2.03 $27.63 $35.52 $24.48
BB&T Corporation (NYSE: BBT  ) $1.83 $24.99 $32.08 $31.20

Source: Yahoo! Finance and author's calculations.

Only regional bank behemoth U.S. Bank trades above its current Graham number, though BB&T is getting pretty close. U.S. Bank recently passed the third round of Fed stress tests and promptly announced a 50% increase to its dividend payout. Capital One finally received the Federal Reserve's blessing on its acquisition of ING's ING Direct segment, making it the fifth-largest depository institution in the U.S.

By working primarily as an intermediary between various financial companies and the government, BNY Mellon is somewhat less affected by certain new banking regulations, and recently announced a plan to buyback $1.2 billion in stock. Finally, BB&T is approaching its Graham number after a successful 2011, a year which saw nonperforming assets decrease 38% from year-end 2010.

Accountability time
As a large bank a step down from the "too big to fail" banks, PNC Financial provides an alternative to investors interested in the financial sector. As the economy continues to recover, its various products will allow it to benefit in multiple ways. Therefore, I will be placing a "thumbs up" over on my CAPS page in order to track this call and keep myself accountable.

PNC Financial may not be the only opportunity to profit from smaller banks. Many investors are interested in bank stocks, including Warren Buffett himself. Our special report "The Only Stocks the Smartest Investors Are Buying" explains why Buffett would buy one bank in particular were he a smaller investor. Click here to get your free copy today.

Fool contributor Robert Eberhard holds no position in any company mentioned. Click here to see his holdings and a short bio or follow him on Twitter. The Motley Fool owns shares of PNC Financial Services Group. Motley Fool newsletter services have recommended buying shares of BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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