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.
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.
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.