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Billionaire Warren Buffett Holds This Regional Bank, Should You?

BERKSHIRE HATHAWAYFrom “the Wizard” to “the Oracle of Omaha,” Warren Buffett is a man that is known by many names in the financial world. While most amateur Buffettologists are likely aware of the iconoclast’s investments in industry stalwarts like Kraft Foods (NASDAQ:KFT) or Coca-Cola (NYSE:KO), they might have missed his mid-sized position in M&T Bank Corporation (NYSE:MTB). At the end of the second quarter, Buffett’s 13F filing with the SEC, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) reported holding close to 5.4 million shares of M&T Bank worth a total of $444.4 million. Good for 0.59% of Buffett’s 13F holdings, his position in the regional banking company is the 17th largest of its kind in his portfolio, sandwiched between Bank of New York Mellon (NYSE:BK) and Liberty Media (NASDAQ:LMCA).Going as far back as our database tracks, Buffett has been long on M&T Bank. Like most of his investments, the stock has generated a whopping return over the long haul. Consider these statistics: anyone with the foresight to purchase shares of the bank in the early 80s would have made close to a 10,000% return in the past thirty years. In other words, an ’82 college graduate who started an early retirement fund with $1,000 invested in M&T would have experienced an average before-tax gain of $3,280 per year over the next three decades for a grand total of $98,400.

If you missed out on this appreciation though, you’re probably thinking: “fine, but will it continue?” After all, it doesn’t give investors much solace if they’re constantly looking over their shoulders, pondering the returns they missed out on. While simple arithmetic tells us that such stratospheric returns are impossible to achieve for those who didn’t invest in at this stock’s ground floor, it’s still worth delving into the details to determine if M&T can be a good addition to your portfolio if a new position is initiated today.

In 2012, M&T Bank has generated positive earnings surprises in each of its first two quarters, and in its most recent Q2 release, the regional banking company reported an EPS of $1.71 a share, beating the Street’s consensus by 3 cents. M&T was able to beat expectations because of a few factors including: (1) a smooth integration of Wilmington Trust, which it acquired last year; (2) a higher portion of non-interest bearing loans; (3) commercial and recreational finance loan growth in the double-digits, higher than expected; and (4) a continued influx of customers from last year’s New York-area HSBC divestiture.

Interestingly, M&T Bank’s Tier 1 common capital ratio at the end of this period was estimated to be 9.32%, down 6 basis points from three months earlier. In comparison to some of the bank’s competitors, M&T’s core capital is weaker than Susquehanna Bancshares Inc (NASDAQ:SUSQ), BB&T Corporation (NYSE:BBT)Fulton Financial Corp (NASDAQ:FULT), and Valley National Bancorp (NYSE:VLY). BB&T sports the highest Tier 1 of the group at 12.83%, while Valley National is closer, but still above M&T Bank with a 9.95% Tier 1.

In the company’s official second quarter earnings release earlier this summer, execs stated that they “expect the net interest margin to be fairly stable over the second half of 2012,” and project moderate “growth in net interest income throughout [the year].”

Speaking of forward-looking estimates, the twenty-something Wall Street analysts that cover M&T expect it to generate EPS growth at an average of 9.4% a year through the end of 2013. In comparison to its aforementioned competitors, only Susquehanna (66.3%) and BB&T (32.8%) have better prospects. In terms of dollars-and-cents, M&T is expected to finish next year with earnings of $7.70 a share, placing the stock at a rather dull forward P/E of 12.2 times these estimates. Only Valley National (14.1X) has a higher forward earnings multiple, but it’s impossible to determine how shares of M&T are valued without factoring growth into the equation.

At its current market price, M&T sports a PEG of 1.5; typically any figure between 1 and 2 signals that a stock is fairly valued. More importantly, though, the bank’s EPS growth trades at a premium to the likes of Susquehanna (0.7), BB&T (1.4), and Fulton (1.1), which all have lower PEG ratios. While it’s tempting to conclude that this stock has high P/E and PEG ratios, so it must be overvalued, it’s important to realize that M&T trades at relatively attractive cash flow multiples, especially on a free cash basis. The stock sports a P/CF of 7.6X and a P/FCF of 11.4X, which are discounted nearly 10% below industry averages. Growth-related cash flow metrics yield a similar conclusion.

Thus, we can conclude that M&T Bank has solid financials with moderate growth potential, but its valuation metrics are mixed. Individual investors would be wise to realize that Buffett originally purchased this stock when it was trading at a cheaper valuation, and he’s not the kind of investor to just dump shares of a stock once they become a wee-bit overvalued. If Buffett mimickers want to get into this stock because of its decent prospects they can go right ahead, but there look to be better value-plays in the banking industry at the moment, especially on the back of QE3.

For a complete look at Warren Buffett’s 13F portfolio, continue reading here.

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