2 Speculative Financials to Consider Now

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Spin-offs, split-offs, and asset sales are usually good news for investors. They represent a streamlining of a firm and are evidence that managers are willing to make their fiefdoms smaller if it makes sense strategically. Today I will examine financial service firms that are streamlining their operations and product offerings.

Regime Change Opportunity

Now that Michael Corbat has taken the place of Pandit at the helm of Citigroup (NYSE: C), some shareholders want to exploit this leadership change to get parts of Citigroup spun off. The Benedictine Sisters of Mount St. Scholastic and the AFSCME Employees Pension Plan, who own a collective $9 million of Citigroup shares, filed the proposal along with Trillium Asset Management.

The proposal calls for the bank to be broken up. Rebuttals to the proposal suggest that it lacks specifics since it does not say what exactly is to be spun off. The proposal may suffer from accounting errors after one of the group contested the difference in figures between what the market indicates Citigroup’s assets are worth and what Citigroup itself claims. Citigroup could opt for its investment banking division, although it is argued that the unit is not worth much considering it has generally been a laggard; it only benefits from being tied to Citigroup's large bank and relatively cheap access to funds. Global investment banks have generally struggled since the financial crisis, and finding a buyer may not be easy either.

Another option would be to sell Citigroup’s global transaction processing unit. However, this has been its consistent money maker and did not cause any problems in the financial crisis. Selling it may not be prudent either, since separating it from the rest of Citigroup’s banking business would undermine its core function as a bank—enabling customers to make payments around the world.

Corbat will probably need to try something different to revive a firm that has consistently underperformed its peers for years. The vice president of Trillium Asset Management, Jonas Krons, emphasized, "If there's not an appetite for our proposal so be it. But we think there should be a discussion."

Citigroup is cheap on a price-to-sales and a price-to-book basis, but it is no bargain:

Ticker

Company

P/E

P/S

P/B

P/FCF

D/E

BAC

Bank of America

29.39

1.94

0.48

3.28

2.5

C

Citigroup

15.8

1.59

0.59

5.97

2.8

JPM

JPMorgan Chase

9.09

2.83

0.81

3.01

3.54

PNC

PNC Financial Services

11.33

2.79

0.76

4.81

0.86

WFC

Wells Fargo

10.39

3.57

1.13

8.29

1.18

Citigroup has a low price-to-sales multiple, but it is not the cheapest on the basis of earnings nor is it the cheapest based on the book value of its assets.

Though an activist investor-led asset disposal or spin off would be amazing news for Citigroup shareholders, we don’t know if this will actually happen. Don’t hold your breath: selling assets might require write-downs and would require willingness from board members and executives.

With this in mind, don’t buy Citigroup yet. If you are looking to buy Citigroup, wait for a price decline based upon news of a write-down or some other management announcement that assigns bad news to past management. Once the stock price sinks in response to news like this and the stock trades at lower multiples than its peers, then Citigroup would be a good choice among other bank stocks.

AIG to Sell Unit

American International Group (NYSE: AIG) plans to dispose of its 90% stake in International Lease Finance, a segment that leases airlines. A Chinese investor group will buy this stake for about $5.28 billion. Under the terms of the transaction, the group would acquire an 80.1% stake in International Lease Finance for about $4.2 billion, with an option to buy an additional 9.9% stake in it. The Chinese investor group is led by Weng Xianding, the Chairman of New China Trust, and comprises of China Aviation Industrial Fund and P3 Investments.

The deal is expected to be completed by the second quarter of 2013. The deal is pending U.S. regulatory approval.

Henri Courpron, the CEO, and Frederick Cromer, the president of International Lease Finance, would continue to operate the company after the business changes ownership. Earlier in June, Henri was docked $1 million in pay after discovering that he had an inappropriate relationship with an employee that was against AIG's expectations of its officers.

During the financial crisis in 2008, the company received a $182 billion bailout from the government, which it is trying to pay back by selling off parts of its business. Earlier, the government had 77% stake in AIG, which it is selling off gradually. According to the regulatory filing, the U.S. owned about 16% of the outstanding shares in the company as of Sept. 30. The company is still complex, but it is clearly streamlining its assets and its obligations.

More Disposals

ING Group (NYSE: ING) announced the sale of its Malaysian insurance unit for 1.3 billion euros to AIA Group. This transaction would increase AIA’s profit percentage to 13%, which would be a 5% increase in overall scenario.

This deal is likely to go through. Mark Tucker, AIA’s CEO, took it upon himself to re-imagine the company's future after it had suffered a huge setback during the financial crisis after its parent company, American International Group, was bailed out in 2008. Tucker said that AIA is so strong now that it can grow while simultaneously acquiring new assets calling it an “excellent strategic fit.”

Big Insurance Valuations

Ticker

Company

Country

P/E

P/S

P/B

P/FCF

AIG

American International Group

USA

2.36

0.71

0.49

12.3

BRK-A

Berkshire Hathaway

USA

16.59

1.42

1.2

20.17

ING

ING Groep

Netherlands

189

0.65

0.49

NA

LFC

China Life Insurance

China

60.04

1.49

2.56

4.89

MET

MetLife

USA

15.53

0.51

0.53

2.46

PUK

Prudential

United Kingdom

14.73

0.59

2.44

NA

Among big insurers, AIG and ING are the cheapest based on price-to-book values. They are also cheap on a price-to-sales basis. Investors should consider these two stocks as potential buy candidates among financials based on their low price multiples and their intentions to simplify their businesses.

Like most big financial service companies, AIG and ING are complex and probably too hard for mere mortals to understand. Arguably the most prudent course would be to swear off these companies altogether. If you can’t bring yourself to do that, AIG and ING are cheap speculative bets.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of American International Group and Citigroup Inc and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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