Unlocking the Value of 1 Stock

Source: Tripp.

Over the past year, one stock has seen its price return less than half of what its peers have -- yet the market may be overlooking the potential value.

At times, banks can seem too complex to evaluate. Credit default swaps, variable interest entities, and a host of other things sprinkled throughout the footnotes of SEC filings are enough to make even the most seasoned and intelligent investor dizzy. Yet some smaller banks have less complexity and are a touch easier to value.

One bank that should be on your radar is Pittsburgh-based PNC Financial Services (PNC 0.29%) -- the 12th largest bank in the U.S. While PNC and its $300 billion in assets doesn't sound small, when it comes to banks, it pretty much is.

For example, the top five bank holding companies in the U.S. have almost 30% more assets than the next 45 combined ($8.8 billion versus $6.9 billion). 

While size can matter and vary greatly, what's more important is: What is the market willing to pay for a share of this business, and does it look attractive in the long run?

When it comes to any company, you have to look at the whole picture, and not simply focus on one metric. For example, if a bank has a return on equity that is double that of its peers, but is 3 times more leveraged, it may not be so attractive. With that in mind, let's check out a few of the regional banking players.

While business execution and strategy are critical when evaluating a potential investment, a reasonable valuation is just as important. As Warren Buffet and Charlie Munger have been known to say, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." And as this great quote relates to banks, banks must be able to generate income from the assets they hold, as measured by return on assets:

Source: Company SEC Filings.

It should be noted here that while Fifth Third Bank is the leader in the clubhouse, it actually realized a gain of almost $250 million as a result of selling its shares of payments company Vantiv. Were it not for that, it would have an ROA of 1.1%. 

While PNC and U.S. Bancorp are the standouts here, it's also important to note how well PNC has performed:

Source: Company SEC Filings.

As you can see, despite a difficult 2012, PNC has really begun to turn things around in 2013 thanks to its diligence and focus in returning to profitability.

Yet return on assets isn't the whole story -- and we see once more that PNC and U.S. Bancorp have done tremendous jobs returning dollars to their equity holders:

Source: Company SEC Filings.

While we see here that U.S. Bancorp, PNC, and BB&T are on a pretty clear path to continue stable returns to their shareholders... the inevitable question becomes, what does the market consider of their relative value? By looking at the price to tangible book value (which measures the stock price to actual value of a company's equity base) of these companies, we see something very interesting:

Source: Capital IQ.

As you can see in the chart above, despite PNC having better return on assets and return on equity metrics than BB&T, the market is offering far less for PNC's equity compared to BB&T's. That difference is even more striking when compared to U.S. Bancorp, where the multiple is nearly twice as high.