Lengthy report on WM FYI.
I follow WM for my investment club and bought more shares shortly after I filed this report. Today they reported record fourth-quarter earnings of $842 million, or 97 cents per diluted share, for the period ended Dec. 31, 2001, up 56 percent on a per share basis from $497 million, or 62 cents per diluted share for the same period a year ago.
Annual earnings for 2001 were also a record at $3.11 billion, or $3.59 per diluted share, versus $1.90 billion, or $2.36 per diluted share in 2000.
I got a "Buy" up to $36.42 and an up/dwn of 3.9/1 on my SSG 1/6/02 using the the following criteria:
- 25-50-25 zone
- ave high PE of 17.6 (gving forecasted high price of $81.35)
- est. low price of $21.44 (forecasted low price with ave low PE of 9.1)
- EPS growth of 14.3%
- Kris
Cover Sheet
Date: January 8, 2002
Company/Symbol: Washington Mutual / WM
1. What do they do and how do they make money? (Crayon Test) Financial services company (thrift) serving consumers and small to mid-sized businesses. It does: mortgage banking, consumer banking, commercial banking, financial services and consumer finance.
2. Anticipated source of future growth? WM is gaining new customers as it expands in the east, NYC, and the south. Recent acquisitions were Dime Corp. and the U.S.-based mortgage-lending unit of National Australia Bank Ltd. (called “very low risk” and meaning they are less reliant on tech-heavy California.)
Because WAMU is both a lender and a mortgage banker, they can generate income throughout different interest rate environments with products and services like commercial banking, consumer finance, securities brokerage, mutual fund management and property/casualty/life insurance, and CDs. They attract new checking account customers with no-fee checking, and then can cross-sell other products.
3. If stock price has dropped recently, why? Jim Jubak 11/6/01: Lower interest rates have raised fears on Wall Street that Washington Mutual could see a drop in business as homebuyers switch from the adjustable-rate mortgage where the thrift is strongest to fixed-rate mortgages. The picture I believe is a little more complicated -- and much more positive -- than those worries suggest. First, drops in interest rates also have a positive effect on Washington Mutual, increasing the thrift's margins in its mortgage business. And second, management has done an effective job hedging the effects of shifts in the mortgage market by using such tactics as selling part of the existing portfolio when asset prices climb due to falling rates. In my opinion, the drop in Washington Mutual is overdone.
Kris: A few years ago when Greenspan was raising fed rates we saw a contraction of WAMU's stock price because of the resultant squeeze on their margins. Most thrifts suffered then. The recent fed cuts, which make it cheaper to borrow money, have fueled a surge of mortgage business as buyers move to take advantage of lower rates through both refinancing and new loans. Savings and loans stocks are generally viewed as defensive plays. They perform best when the Federal Reserve is cutting interest rates and the stocks of more fast-growing companies, like technology firms, are falling. If you're convinced the economy has bottomed out and tech companies are ready to get back on track, then you might not want to buy WAMU. Bottom line: This is a company growing earnings at a compound rate over 20% and it is selling for around 8 times earnings!
ValueLine: They boosted their loan loss provision substantially, and the market sold off. Wamu set aside far more reserves than needed to stay ahead of the curve.
Concern: weakening economy, rising job losses and consumer debt. The number of residential mortgage holders who were 30 days or more delinquent on their loans rose to 4.87% in the third quarter, up 0.24% from the second quarter, the Mortgage Bankers Association said. “The weakening GDP and job losses in the technology and manufacturing sectors have affected homeowners’ ability to keep their mortgage payments current,” said a chief economist of MBA.
4. What is the Fair Value?
Kris’ Graham Calculation (using only 8% EPS growth and maximum PE of 8.5):
Graham Fair Value: $67.27
Current Price: $32.47
Percent Growth to Fair Value: 107.17%
VectorVest:
PRICE: WM closed on 01/04/2002 at $33.73 per share.
VALUE: WM has a Value of $51.12 per share.
5. Does the company have a sustainable advantage gained through business momentum, patents, a quasi-monopoly, visionary leadership, a proprietary product, new technology, great management and/or inept competition?
Yes, they have a seasoned management team that's been together for many years. They know how to grow. They are innovative risk-takers with a conservative, careful bent, in my opinion.
They have a strong and growing brand. It test well, perhaps because of the connotation of George Washington, or perhaps because people associate "Washington" with the word "trust," D.C., or whatever. The brand has successfully crossed the chasm from local thrift ("The friend of the family") to national player. The Occasio retail concept pioneered in Las Vegas has broken all internal expectations. It's innovative. It's low cost. Customers like it. It tests well.
Size counts, and so does geographic coverage. WAMU is now the largest thrift in the country. As they grow and integrate, they Increase efficiency, lowering relative costs while increasing scale. Washington Mutual has a history of successfully integrating acquisitions.
They know how to treat customers. In May, WAMU was the winner of the Satmetrix Best Customer Satisfaction Award for the financial services category. "Washington Mutual distinguished itself further by being one of only a few national banks to score higher than its regional competitors." WAMU uses comprehensive feedback systems and a number of incentive programs to assess and reward high levels of customer satisfaction.
6. Are the Net Profit Margins 10% or greater? Yes: 14.9% (SmartMoney)
7. Is the future PE less than 30? Yes: 8.5 Is the PEG ratio below 1.0? Yes: .68
8. Is the 200-day average on an upward trend? No; turned down November 1.
9. If the stock has dropped suddenly on bad news, have I waited 5-7 weeks for a base to form? Yes Am I sure this is the only bad news? Should I wait till the next quarter’s announcement? If not, what’s the urgency to buy now? WM’s price started to fall in September and reached a bottom on November 1. It is starting to climb again. The reason to buy again is that it is a compelling value for its growth.
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November 23, 2001
…..Sanford C. Bernstein's Strategic Value fund includes a lot of these bargain-priced issues, which Bernstein calls "deep-value stocks." Washington Mutual is one stock that Bernstein has favored this year. The nation's largest thrift with offices in 42 states, Washington Mutual has traditionally been strong in adjustable-rate mortgages. Those ARMs have recently lost share to fixed-rate loans because long-term interest rates have been so low. As a result, the share price is now undervalued relative to other financial companies. Earnings could grow percent 13 annually over the next five years, and the yield is 2.9 percent. At $33.10, the stock trades at nine times next year's earnings.
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Wednesday December 5, 2001
Forbes.com The Overachievers
By Lisa DiCarlo
….these five overachieving companies stood against the tide and didn't get knocked over:
Washington Mutual
It's tough to get excited over a thrift bank that specializes in savings and loans for middle-income people, but that's exactly what has driven the success of Washington Mutual. The Seattle-based bank has more than doubled its assets over five years to about $250 billion. Growth this year has come from acquisitions, namely the mortgage businesses of Fleet Mortgage and PNC Financial Services Group. Through the first nine months of this year, Washington Mutual has already surpassed the earnings per share it recorded in all of 2000. At an estimated $3.51 per share, 2001 earnings will be up 51%. Growth will slow in 2002, with earnings expected to grow 10% to about $3.96 per share. Still, Washington Mutual will continue to benefit from low interest rates, which have already had a positive impact on net interest margin. While other large companies cut or eliminated dividend payments this year, Washington Mutual actually increased its dividend payment by a penny, to 24 cents a share.
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Interview snippet with Chicago-based Harris Associates are value managers who buy shares of a company only when it's trading at 60% or less than what they think it's really worth…..its 28% annualized gain over the past five years tops all mid-cap value funds and ranks third in the entire fund universe.
What are a couple of companies that stand out to you as solid bargains at today's prices, and what's your rationale in each case?
First, I'd choose Washington Mutual. It's a $32 stock that we think should earn about $4 a share next year. It's grown above 15% per year historically going back over the last 15 years. Looking forward, we think it should continue to grow at a faster rate than the S&P 500, something into the teens per year. It pays a 3% yield right now, which is pretty competitive with short-term interest rates.
If you compare it to leaders in other commodity businesses, where a company's cost advantages is helping it build market share, then you see similarities with a Wal-Mart. If I'm wrong, eight times next year's earnings is a fair price anyway. If I'm right, you've got the potential of a doubling or a tripling of the P/E multiple while earnings go up 10% to 15% per year. To get upside like that with as little risk as this seems to look like an incredible opportunity.
The reason that we have the weighting we do in Washington Mutual is that we believe that it is significantly undervalued and the range of potential values of the company is quite predictable and quite narrow. We believe that the management is the best in the industry, and they have most of their net worth invested in the company. |
