One on One with Richard Bove, Banking Analyst at Punk, Ziegel and Company
Monday, April 14, 2008
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SUSIE GHARIB: Back now to our top story, those disappointing quarterly numbers from Bear Stearns and Wachovia and a bleak outlook for the financial sector earnings. Despite that, our guest tonight says this is a good time to buy some bank stocks. Joining us now, Richard Bove, veteran banking analyst at Punk, Ziegel and Company. Hi, Dick. RICHARD BOVE, BANKING ANALYST, PUNK, ZIEGEL & CO.: Hi, Susie.
GHARIB: So why is it a good time to buy financial stocks?
BOVE: Well, I think that this is probably going to be the worst quarter of this particular cycle. I think that with the huge write-offs that we're taking in the fourth quarter and again sizable write-offs that will be taken in this quarter, that if you take a look at the second quarter, it will be better than the first quarter. The third will be better than the second and the fourth will be better than the third and so on up. I think for the next couple of years on a quarterly sequential basis, you'll see earnings stronger and stronger and stronger in this industry.
GHARIB: But not long ago many analysts, yourself included, were very down on financial stocks. I mean what has really changed?
BOVE: Well, I think what has changed is the recognition of what the potential losses could be. Because now we have had these huge write-offs, none of which are actually reducing the cash flows of these companies. So if you are taking the write-offs, if the stocks have gone down substantially, but the cash flows of the companies are continuing to rise, that creates real value which is not being recognized in the prices of these issues.
GHARIB: Now you're recommending Citigroup and also Bank of America. And we're expecting, you heard our report, we're expecting a loss from Citigroup on Friday and steep decline in earnings from Bank of America, so give us your analysis about why you are buying these stocks.
BOVE: The case of Citigroup, I doubt that anybody would be, you know, shocked by anything around a $12 to 15 billion write-off because for the last two to three months, people have been projecting that. So in essence one would think that that is in the stock. The company still does have the best franchise of any bank in the world. There is no bank in the world that is in 102 countries. There is no bank in the world that has a full array of products as Citigroup has. So it has everything everywhere. In addition to which it has something on the order of $5 billion a year, sorry, a quarter in free cash flow which is $20 billion a year. And I think that puts it in the top six in the world in terms of free cash flow. The company's management is doing a great job in my view in turning this thing around. So I think it's a cheap stock.
GHARIB: And Bank of America?
BOVE: In the case of Bank of America, it is America's bank. More than 10 percent of the deposits of this country are in that bank. And that bank is the largest lender in the small business market. It is the largest lender in the middle market. It is the largest credit card company. If Bank of America cannot do well, the United States economy cannot do well. Because basically it's a mirror image of what's going on in America. I don't think that we're looking at a recession which is so deep and so long that companies like Bank of America will not be able to continue to grow their earnings.
GHARIB: I want to run through a couple of other names. Your view on JPMorgan and Merrill.
BOVE: JPMorgan and Merrill are both heavily into the brokerage industry. JPMorgan because of its acquisition of Bear Stearns on top of what it already had and Merrill as a result of it being its core business. I don't like the brokerage industry. I think the brokerage industry has seen its best year and it will take two to three years to get back to where it was in 2006 or 7.
GHARIB: And how about companies like Wachovia and Washington Mutual?
BOVE: Wachovia and Washington Mutual both have a high housing input in terms of their operations. So in the case of Washington Mutual, I don't expect them to show a profit in any quarter this year. I don't even expect them to show a profit in the first half of 2009. So it's obviously a very high-risk investment and I would stay away from it. In the case of Wachovia, it made the mistake of buying Golden West and it's suffering as a result of that acquisition. And I think that is the reason that they are under such pressure at the present time. But fundamentally it is a good, sound bank and I would say I would be more positively oriented than negative on that stock.
GHARIB: Quick question, quick answer, what if there is a recession, a long recession and consumer spending really slows down? All bets off on investing in bank stocks?
BOVE: Yeah, I mean if there is a long recession and it is very deep, then obviously loan losses are going to be higher than I suspect they'll be and then I'm going to be wrong. But the fact is that I think there are a lot of factors that would suggest that the economy may not be as weak as people are currently suggesting.
GHARIB: All right. Dick, thank you so much. You always have good information for us. We really appreciate it.
BOVE: Thank you, Susie.
GHARIB: My guest tonight, Richard Bove, veteran banking analyst Punk Ziegel and Company.
