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business newsRoyal Bank Of Scotland Is No Busted Flush
By
Justin Sharon
Apr 11, 2011 4:55 pm
The Independent Commission on Banking has issued its eagerly awaited interim report and concluded that breaking up is indeed hard to do.
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Any Bravehearts out there who are still slightly peeved about how the country that gave us Adam Smith was relegated to 6th Avenue on Saturday while Greece -- whose more recent gifts include debt-to-GDP ratios of over 150% -- gets fancy 5th, fear not: Shares of the Royal Bank of Scotland Group ADS (RBS) ended up 2.55% on a double dose of good news. Across the Atlantic the Independent Commission on Banking has just issued its eagerly awaited interim report and concluded that breaking up is indeed hard to do. Rather than establishing an British version of Glass-Steagall, aimed at separating retail from investment banking, it has instead proposed far less draconian measures. Thus the Edinburgh institution founded in 1727, still majority owned by the UK government, has emerged relatively unscathed. The five member panel will release its final report this September, three years on from that September when the Lehman debacle unfolded, precipitating much of the ongoing unpleasantness for financials.
Among the tweaks the commission suggested today is for banks to hold additional capital reserves, hardly an overly onerous demand. Indeed many in the market are suggesting the panel has merely kicked the can till a later date, although chairman John Vickers was quick to say “I absolutely reject any notion that we’ve bottled it” -- bottles being more popular than cans in England anyway. He added “I think these could be absolutely transformative and a landmark set of reforms.” Royal shares got a further boost from Barrron’s over the weekend. In a bullish article on the preferreds, the weekly suggested there’s money to be made by “Tapping into [the firm's] cash machine.” (An appropriate metaphor as the ATM’s inventor lived and died in the land of tartan. They say you can’t take it with you but these Celts are famously frugal so I wouldn’t be so sure he didn’t.) Barron’s says the bank “has been experiencing a cosmic makeover” with Tier 1 capital up from 4% to 10.7%, well above Basel III requirements of only 8%. Annual losses have also declined from $38.42 billion to $1.68 billion. The company is far from out of the woods -- inflation and a still-iffy economy are cited as headwinds in the Highlands. But today at least, the bank has an additional Royal excuse to party.
Please see European Banks Running Out of Options to Raise Liquidity and Why European Banks Are Issuing Debt in America.
First Republic
We’ll stay in the sector for our second stock, similarly surging. In defending his country’s recent burqa ban Prime Minister Francois Fillon said “The French Republic lives in a bare-headed fashion” but today it is First Republic (FRC) which has nothing to hide. Shares of the tony private bank gained 2.29% for all the world to see after JP Morgan, which knows all about white shoe banks, boosted it to Overweight from Neutral with a $35 price target ahead of its earnings announcement on April 20. This San Francisco based firm provides wealth management services to the sort of high net worth individuals you would expect from a company whose CEO and CFO answer to the blue blood names of James H. Herbert II and Katherine August-deWilde. First Republic has had several incarnations, being bought by Merrill Lynch’s private client business for $1.8 billion in 2007 only to be sold on by Bank of America (BAC) two years later to a private equity consortium. It boasts about $22 billion in assets and has a 25-year record of strong credit quality. Further, roughly 60% of fee revenue comes from wealth management, a relatively recurring and high margin business. Their mantra is “It’s a privilege to serve you” and, while one unfortunate 88-year old who invested in munis at their suggestion may not feel the same way, it’s an institution with good growth prospects. That said, First Republic’s current valuation appears somewhat stretched, and any flattening of the yield curve will negatively impact earnings.
Flowers Foods
Since Bernie Madoff seems to have become a real romantic behind bars he must surely approve of honey bun maker Flowers Foods, Inc. (FLO) -- whose products are particularly popular in prison -- ending up 1.88% on its well-received acquisition of Tasty Baking Co. (TSTY) today. Georgia based Flowers went public at the height of Flower Power in 1968 and it also does a fine line of tortillas, bread, and bagels. (The latter is especially reassuring for us native New Yorkers who are still incredulous over the recent bankruptcy filing of iconic H&H.) Flowers will pay $34.4 million in cash to purchase Philadelphia’s Tasty, a deal Jim Cramer has already hailed as “very opportunistic” which “works out very well for everybody.” Indeed the fact that shares of the acquirer unusually went up is a sign the market likes this combination. Tasty, which has been in dire straights financially since January, is taken out at a pretty premium of almost twice where it closed on Friday. Concerns include rampant commodity cost inflation and the fact that almost 21% of Flowers’ consolidated revenue comes from sales to just one company, Walmart (WMT). If this afternoon is any indication however, who needs Easter orchids when there’s Flowers Foods?
The Future of Food Prices: Sugar has related research.
Energizer
That Hop rabbit is America’s top movie and the Playboy bunny continues bouncing along, Hugh Hefner having entered his 86th year on Saturday looking forward to wedding number three. But for the famously indefatigable Energizer (ENR) bunny, this looks like a tired Easter time. This consumer products powerhouse makes Hawaiian Tropic but there is really no need for Donald to dispatch the detectives to the Aloha State. The reason for today’s 2.32% tumble was clear, UBS reducing its rating to Neutral from Buy. Besides its eponymous and Eveready battery brands, they boast an array of other labels including Banana Boat, Schick, Wilkinson Sword, Edge, and Wet Ones. Shares have been solid if not spectacular performers over the past year, up roughly 12%, and at about 13.8 times its forward price/earnings ratio, still appear undervalued. The company’s sun care business offers particular potential, but risks include fierce competition from Procter & Gamble (PG) and lackluster sales in feminine care products since acquiring Playtex in 2007.
Turn to Edge Shave Gel Company Attempts to Stop Irritation, Buy Loyalty for more.
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No positions in stocks mentioned.
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