Thursday, July 10, 2008

Wachovia (NYSE:WB): Buyable?

- Goldman Sachs notes the good news is that Wachovia has a new CEO. The bad news is that nearly half of the ~$8bn of capital raised in April has already evaporated. If they set aside the good news, the conclusion from the bad news is that more capital is required and the easiest and least expensive source has to be a cut to the dividend, which is still sizeable at $3.2bn annually.

While the stock may be up on the initial CEO announcement, the real outlook hinges on capital. This quarter's loss of $1.23 to $1.33 per share implies that WB will be cumulatively unprofitable since the credit crunch began. Given a lack of profitability and declining capital ratios, a dividend cut is likely while a broader capital plan may include asset/business sales. A goodwill write-down will also come to recognize that Golden West is impaired, but valuation and capital are both based on tangible book.

WB trades at 1.1X GSCO estimate of 2Q tangible book value. Firm's 12-mos DCF price target is $20. Maintains Neutral.

- RBC Capital believes Wachovia's stock will likely remain under pressure until credit quality stabilizes, the timing of which will likely take place in 2009. Under the leadership of its new CEO, they expect the company to incur a significant charge to "clean-up" its problems once and for all, eliminate its dividend and raise additional capital.

- Ladenburg thinks the hiring of Robert Steele will keep alive the belief that Goldman Sachs (GS) will acquire WB.

Firm's 12-month price target of $13 represents an estimated 75% of estimated tangible book value which is well above the 30% level the "Ground Zero" banks traded down to in late 1990-early 1991. Rating is unchanged at Sector Perform with Average Risk.

Notablecalls: I must say I have to take the opposite view here. I suspect Steele wanted some decks cleared before (write-offs) coming in. A guy coming from Goldman Sachs wants to keep looking good.

That makes WB buyable here just under $13

1 comment:

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