10-Year book value chart
As the below chart highlights, the book value was typically closer to 1.5-2 times prior to the financial crisis. The typical stock in this group would need to almost double in order to reach that pre-crisis normalcy.
ACAS Price / Book Value data by YCharts
Earnings potential to grow book value
As with the insurance and airplane leasing stocks listed in parts 1 and 2, the interesting dichotomy in this group of financial stocks is that the earnings potential remains strong. All of the stocks, except GSV Capital Corp (NASDAQ:GSVC), have solid earnings generation potential. The question is, how a stock can trade below book value that generates solid profits that will grow that value?
American Capital Ltd. (NASDAQ:ACAS) is expected to report flat earnings of $1.16 last year to the same amount next year. The stock trades at the forward multiple of 11.2 times those estimates. The company has taken advantage of the stock trading below book value by consistently buying back stock with those earnings. With the stock dropping to $13 recently, investors should expect the company to continue repurchasing stock at a steep discount.
GSV Capital Corp (NASDAQ:GSVC) is the unusual stock in the group in that it lacks earnings since it doesn’t have an operating company. Rather, this BDC hopes to capitalize on gains in the positions of investments held.
Regions Financial expects earnings to grow from $0.74 in 2012 to only $0.86 this year and 2014. On an earnings multiple basis, the stock trades at 10.4 times those forward estimates. The stock provides a minimal 1.30% dividend yield.
SunTrust Banks is expected to see earnings dip from $3.59 in 2012 to $2.92 in 2014. The stock trades at roughly 11 times those forward earnings estimates. The stock provides a minimal 1.20% dividend yield.
Bottom line
While this group of stocks was not covered back in January, the fact doesn’t change that BDCs and regional banks offer tremendous value when still trading below book value. None of these stocks provide much in the way of a yield for conservative investors, but the regional banks probably provide more stability for risk adverse investors. The BDCs offer more aggressive growth opportunities depending on whether an investor wants to bet on the success of Twitter via GSV Capital Corp (NASDAQ:GSVC) or middle market companies via American Capital Ltd. (NASDAQ:ACAS).
Mark Holder and Stone Fox Capital Advisors, LLC own shares of American Capital, Ltd. and GSV Capital. The Motley Fool has no position in any of the stocks mentioned.
The article Buy the Financials Still Trading Below Book Value – Part 2 originally appeared on Fool.com.
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