Despite the market's recent surge, money manager Robin Manners West believes a lot of stocks are still undervalued. West, who manages $1.5 billion for the New Mexico State Investment Council, has been investing the bulk of the funds in banks--ones she considers "undervalued franchises destined for takeover."
Her top picks: First Chicago NBD (FCN), the ninth-largest U.S. bank, with assets of $115 billion; PNC Bank (PNC), No.13, with $71 billion; and BankBoston (BKB), with $70 billion.
West and her colleagues are not only value investors. "We also pay a great deal of attention to the imminent takeout value of the stocks we like," she says. In 1997, the strategy helped the two financial-stock portfolios West manages to rack up gains of 55.7% and 53.3%, respectively, compared with 48.9% for the Standard & Poor's financial-sector index.
First Chicago NBD, trading at 75, is worth 105 in a takeover, figures West. True, the bank has had poor loan growth and is weak in corporate and institutional banking, she notes. But it has strong fee-income growth and is one of the top five credit-card issuers in the U.S., with 14 million cardholders. "First Chicago will be very attractive for companies needing a foothold in the Midwest and in the hot credit-card business," says West.
Who would be interested? West thinks Banc One might be, because a combination would create the No.2 credit-card issuer in the U.S. (Citicorp is No.1.) Another possible buyer: U.S. Bancorp--to broaden its reach into Illinois, Indiana, and Michigan.
At Pittsburgh's PNC Bank, noninterest revenues make up an unusually large share of total revenues: 44% in the fourth quarter and 42% for all of 1997. For a buyer looking for nontraditional bank businesses where efficiencies can be increased, "PNC is a gem," says West. Potential acquisitors? The fee businesses of PNC would be enticing to First Union. PNC, now 54, is worth 70 in a buyout, says West.
BankBoston, now 95, has been on the buyout list of several financial houses, notes West. One attraction: its Latin American business, which brings in 20% of revenues. "It's one of the most undervalued banks, partly because its Latin American operations are regarded as volatile," says West. "In fact, they are the bank's strength, not weakness." She says there's a 50% chance that a foreign bank will make a pass at BostonBank.