The good news is that RF is on the Fed's preferred banking list so that takes the worst case off the table for RF. On the negative side, the EPS will be lowered to pay the 5% coupon. The stock will now trade on EPS and not on a doomsday type scenario. I see the stock trading between 8-11,imo.8 would give a forward eps of 10.6 and 11 would give an EPS of 14.6 so more or less 10-15 times earnings until the next earnings come out and additional forward guidance.
We agree on the first two sentences. However, I don't think EPS will matter to the point where they'll try to trade it at a "normal" p/e on a bank of 10 or so.
Reason being is that full earnings potential won't be recognized in the next quarter or two or even in any forward guidance. With RF going to be one of the handpicked survivors, you have to look more at potential earnings in 2010 or 2011. And then you have to figure what "normal" is (without all the extra financing schemes the lenders went crazy with), but with double the deposit base. So if they earned $2.26 in 2007, do you knock off a 1/3rd of that? half? to get to $1.13 to $1.50 what they might've earned if everyone wasn't flipping houses? and then figure that they will probably easily double their deposit base and thus customers in the coming year? That gets you to an eps of over $2, and perhaps $3. don't forget to then back out the $.25 per year payment to the feds. So what price do you pay for a bank earning $1.75 to $2.75 a couple years from now (and possibly a lot more if they consolidate all the banks to about 20 or so)? $9 sure looks cheap. $15 isn't so bad either, but that will take a little bit of time to get to.
Buying "crap" is all relative. What this means is that RF is now one of the "chosen ones" that will be backstopped by the fed. They will use this money, and likely future money granted to roll up smaller players getting an even broader deposit base.
Think about the past few weeks. JPM & WFC were among the chonsen national players, and now you have RF becoming one on a more local level. Expect them to pick up several smaller banks that won't get TARP money (see NCC deal today. The NCCs will be forced to merge with the RFs of the world).
congratulations to the longs. Though it would be nice to see how dilutive the warrants are. Not that it really matters all that much given the share price (and the fact they were given warrants with the sole purpose of participating in the stock going up, which means they aren't going to kill the stock).