The BMW Method
Synovus Analysis

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By Sand105
January 2, 2008

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Has anyone looked at this stock? I have taken a position in this one, my first new position since September.

This is the reasoning I used to buy. Perhaps others will find it of use. A late Christmas present (or at the least a funny gag gift ;-))

Synovus is a conglomerate of community banks in the growing southeast. They also own an 81% position in Total System Services (TSS), a payment processing firm. Right now their total market cap is $7.5b, with a 17 year stock price history. Currently the RMS = -2.13 with a Return Factor of 2.05. I like high yielding stocks, and this is no exception. This one is a bit more complicated than typical - see below.

Since the August meltdown I have been looking for baby/bathwater financials and such, hoping to cherry pick the ones that will recover handsomely once sanity returns to the financial sector (CSE and MMA are the other two I have bought into). I believe SNV is one of those. Synovus has no subprime exposure. Net chargeoffs have risen to .51% from .2% last year. These are very benign numbers. Their book value has been rising at 13.5% CAGR (EPS about the same) with the banking portion of the business responsible for the majority of the increases. These will take some hit due to the headwinds presented by the current financial climate, but the effect of these headwinds is a decrease in growth rather than a fall off a cliff.

So, it has been beaten down, but what are the catalysts that are and will drive prices? Two big ones, both related to their spinoff of their ownership stake in TSS. On Dec. 31st they will split in two. This has two big effects:

1. SNV will be falling out of the S&P 500 due to their decreased market cap. There has been downward price pressure due to index fund type selling. The drop this late in the year is likely due in part to this phenomena.

2. The split itself early next year will provide a catalyst now that the two entities will be judged separately. Why is this good for SNV? Their valuation will change dramatically.

To understand the valuation ratios you must dig into the spinoff details. Their new stock price will be at SNV-TSS*.484. One can lock in the post-spinoff price now with their "when issued" shares - ticker SNV-WI. Right now this issue it sitting at $10.65. At the spinoff the new SNV with this stock price sports a P/E of ~9 and a yearly dividend of $.68 (6.25%) with a likely dividend CAGR of 6%.

M* has this as a wide moat 5 Star stock with a fair value estimate of $21. Their Dividend newsletter guy has stated that this is "the most compelling recommendation he has ever made." Having looked into it there is no chance of SNV going to 0 nor any pressure on the dividend (i.e. it is safe). Even now with the stake in TSS it looks to be a compelling issue. With TSS divested it looks to much more so - EPS growth curve of SNV itself (>13%) is much higher than the current P/E - one of the metrics Jim looks for in his acquisitions. From a BMW standpoint we have a beaten down issue with a pretty good pullback on the RF slingshot.

I have gone through it and tried to find holes or compelling reasons not to buy - I can't find any. There is no compelling issue for SNV to be beaten down this far. It is currently priced for a pretty well distressed outfit - the actuality is a solid, diversified, low-leverage outfit. With a bit of time arbitrage I think there will be a nice return on SNV down the road.

If anyone else has an opinion on this one please chime in.