CIT Group Inc: A Host of Tailwinds Could Fuel Big Valuation Growth

CIT Group is a finance solutions provider whose value will depend on a broad recovery in the U.S. economy, increasing leasing demand for commercial aircraft and rail car units as well as the integration of acquisition targets.

Jul 24, 2014 at 12:23PM

Source: Company

CIT Group Inc. (NYSE:CIT), the finance and lending specialist with a market capitalization of approximately $9.5 billion, has convinced investors with strong second quarter earnings, solid book value growth year-over-year and expansion drive that could boost the company's earnings substantially going forward.

CIT Group is an interesting investment for investors who want to get exposure to the cyclical commercial lending and leasing business with CIT Group being active in both the commercial aircraft and rail car lease segments.

CIT Group operates a variety of business segments and provides a diverse set of financing solutions to middle market companies: From providing accounts receivable management to corporate finance advisory and commercial aircraft lease services, CIT Group steps in when companies need to have their financing needs met and when they rely on providers of capital to optimize their business processes.

In other words: CIT Group is a commercial financier with specialized corporate finance knowledge and sizable exposure to the transportation industry.

Book value growth
Generally speaking, CIT Group has a cyclical earnings profile and is a particularly suitable investment for investors who want to rotate their equity investments into dynamic business sectors which are set to profit from increasing economic growth.


The finance solutions provider has done a great job over the last year to increase its (tangible) book value and the company should continue to see strong loan growth and demand for financing and lease assets as the U.S. economy prepares itself for further growth.

CIT Group's total book value per share increased from $43.16 in the second quarter of 2013 to $46.42 per share in the most recent quarter reflecting an increase of 7.6% over the course of twelve months.

Its tangible book value per share grew equally strongly by 6.8% from $41.33 in Q2 2013 to $44.16 in Q2 2014.

CIT Group's increasing book value is an immediate reflection of its solid performance in its transportation and international finance units as well as the company's firm grip on its operating expenses.

High return on assets
CIT Group reported a pre-tax return on average operating assets in the second quarter of 2.64% which generally can be characterized as a fairly high return given the profitability metric.


Source: CIT Group Second Quarter Earnings Presentation, July 22, 2014

Cost cuts continue to contribute to CIT Group's high return measure. However, going forward, investors should expect value to be driven largely by an increase in leasing activity as well as acquisitions, which CIT Group appears to be determined to pursue.

Leasing is a profitable business. Companies lease assets from capital providers such as CIT Group when they are unsure about the sustainability of demand.


Source: CIT Group Investor Presentation June 2014

CIT Group's lease units comprise of an operating lease fleet of 272 aircraft and a total leased fleet of 120,000 rail cars. CIT Group should be among the largest beneficiaries of an economic recovery when airlines and companies depending on rail car transport benefit from increased demand for their services.

Aircraft order volumes are already up robustly and CIT Group should be able to capitalize on demand for younger, fuel-efficient commercial aircraft going forward.

In addition to organic growth, CIT Group can tap two additional sources of value generation: 1. Share repurchases and 2. Acquisitions.

In terms of stock buybacks, CIT Group delivered good news for shareholders at the beginning of the week: The company is about to repurchase up to $500 million worth of its own stock.

Secondly, on July 22, 2014, CIT Group announced the acquisition of OneWest Bank for a total consideration of $3.4 billion in a cash and stock deal. CIT Group expects this transaction to be immediately accretive to earnings and "to be 20% accretive to earnings per share in 2016 generating an internal rate of return (IRR) of 15%".

Mr. Thain, Chairman and Chief Executive Officer of CIT Group commented on the deal rationale:

This transformational transaction will combine CIT's national middle market lending platform with OneWest's wholesale lending and branch banking franchise to create a unique provider of retail and institutional financial services. The transaction diversifies and lowers the cost of CIT's deposits, broadens the products we can offer to our middle market clients, is accretive to earnings and return on equity, and accelerates the utilization of our NOL, while maintaining a strong capital position.

After the transaction, CIT will have increased its total assets by $23 billion to $67 billion and have gained access to an additional $15 billion in deposits.

The Foolish Bottom Line
CIT Group is a financing solution specialist worth considering and might be an attractive alternative to traditional bank investments whose value is more driven by classic loan growth.

Leasing companies are set to benefit from economic tailwinds as demand for commercial aircraft and rail cars increases. CIT Group's focus on this business segment should deliver handsome earnings and cash flow growth as the U.S. economy heads into the next robust expansion phase.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information