CIT Group (CIT) is a favorite pick of Bruce Berkowitz’s Fairholme (Fairx), Mark T. Gallogly’s Centerbridge Partners and Howard Marks’ Oaktree Capital Management. According to Businessweek, the company reported third quarter losses of $16.3 million after paying down debt early. “The quarterly loss of $16.3 million amounted to about 8 cents per share, compared with earnings a year ago of $115.8 million or 58 cents per share. Analysts surveyed by FactSet had expected a larger loss of 24 cents per share.” CIT is nearly two years out of bankruptcy, reports the Wall Street Journal, and it is bullish about the economy, predicting there will not be a double dip recession. Of course, that doesn’t mean that CIT is a good choice.
To get a better idea whether the stock is worth the risk of investment, we are going to look at the company in closer detail, and compare it to its closest competitors – Citigroup (C), Bank of America (BAC) and ORIX Corp (IX).
First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times its earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced, so the lower the better. Of the companies we looked at, BAC has the lowest forward P/E ratio of 6.43. C is next at 6.83, followed by IX at 8.23 and finally CIT at a high 25.92.
We used beta as a measure of risk. A beta of 1.0 means that the stock moves with the market. The higher a stock’s beta, generally, the more volatile the stock, and, as a result, the more risky. A lower beta tends to indicate that the stock moves more independently from the market. CIT’s beta was the lowest at 0.31, according to Zacks. BAC was next at 2.20, followed by IX at 2.25 and C at 2.57.
Next, let’s look at the earnings growth consistency and expectations. Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. BAC lost 27.8% over the last five years, compared to an earnings growth loss of -12.7% for the industry at large. It is forecasted to grow at 7.8% over the next five years, while the industry’s earnings are estimated to grow at 9.3%. C lost more over the last five years (-39.8%), but it is also expected to grow more over the next five (9.1%). CIT is expected to grow even more over the next five years. Its earnings are expected to swell 11.5%. IX is expected to grow the most over the next five years. Analysts predict its earnings will increase by 12.3% in that period. IX also had the smaller loss over the last five years, at -24.4%.
HEDGE FUND OWNERSHIP
Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. Each of the funds we looked at has a fair amount of hedge fund ownership. C was the most popular. Of the 300+ hedge funds we track, 90 had positions in C at the end of the second quarter. BAC was next at 77, followed by CIT at 45. IX had the least hedge fund interest. Just two of the funds we track have positions in the company.
THE BOTTOM LINE
We like IX the best. It has the most consistent growth and a solid track record for consistently outpacing its competitors. Although it doesn’t have much hedge fund interest, IX does have a low forward P/E ratio. We think it is worth the risk. Other financial companies with a similar profile include Prudential (PUK), with a 9.68 forward P/E ratio, and Westpac Banking Corporation (WBK), which has an 11.07 forward P/E ratio.