|Shares Out. (in M):||103||P/E||6.8||6.3|
|Market Cap (in $M):||2,600||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
Long: Banco Popular (BPOP). 100%+ Upside. If This Wasn’t Puerto Rico, Would These #’s Be Compelling?
Thesis: I love this investment because it seems like a complicated mess, but it’s actually very simple – it’s cheap because no one wants to touch Puerto Rican exposed stocks. But, BPOP is a bank that has ~45% market share, limited exposure to Puerto Rican gov’t bonds, and a significant amount of excess capital. Plus, the stock (along with MBI, AGO, and others) faces technical pressure as it is used as a hedge for funds holding Puerto Rican gov’t debt. BPOP is experienced managing a profitable bank in a poor PR economic environment – the island has struggled for nearly 10 years. Over the next few years, I expect to benefit from both a return on capital and return of capital, as they are able to deploy pent-up equity. The process has begun as BPOP initiated a dividend in 3Q15 (2% yield). And, in 4Q15, the North American sub sent $200m of capital to the holdco – a signal of future buybacks.
This stock has been written up in the past on VIC, but I think it’s another good opportunity to buy. You should consider reading the prior write-ups as well.
BPOP trades at 0.60x tangible BV. You might suggest that’s reasonable for a company that has earned a 7-8% ROE. But, one of the reasons that ROE is depressed is because they are holding excess capital. That’s prudent as the country works through its fiscal issues, but ultimately that capital should get returned to shareholders. Let’s go through some quick math. First, I’ll take GAAP equity and boil down to economic capital (what’s necessary to run the current business), then I’ll build back up to shareholder capital (what the company is worth to me):
Puerto Rico Economy
The general macro trends have been poor for the past 10 years, but the data has stabilized recently. The population has declined from 3.72m people in 2010 (as of July 1) to 3.47m people as of 2015. But, the labor force declined by just 67,000 people over the same time period. And, over the past 15 months has increased by 32,000 people. This has brought the unemployment rate down to 12.2% from 15-16% a few years ago.
Home prices are down 17% from 2008, but were up 0.5% y/y in 3Q15. And, the economic activity index has stabilized over the past 6 months after being down for most of the past few years.
Plus, lower oil prices are a benefit to the economy because a majority of their electricity is generated from petroleum inputs. As of October 2015, electricity prices were down 30% y/y.
The bottom line is that although the economy isn’t strong, it isn’t completely faltering either and BPOP is capable of managing their business in this type of environment as they have never had an unprofitable year in Puerto Rico despite the poor economy.
Buybacks below tangible book value.