Friday, June 29, 2007

UK Banks for sale

The valuation of UK banks at the moment is astounding. Here are the PE ratios and growth rates of the largest banks:

Bank 2007 PE Ratio Growth Rate (%) Yield (%)
HSBC 12 9 5
Barclays 10 10 5
RBS 9 9 5
Lloyds TSB 11 10 6
HBOS 9 10 4.5
Northern R 9 15 5

This data is from the III web site and should be taken with a pinch of salt. However it does display the value available at the moment. With most banks yielding as much as a savings account and growing EPS by 10% a year as well it is hard to imagine a portfolio of the above six banks giving a total shareholder return of much less than 15% annually over the next five years.

I already have a large investment in RBS, medium size investments in Lloyds and HBOS and a small investment in Barclays. So I am not really in a position to increase my exposure to banks. But I wish I was because at these valuations I could buy in and sleep very well at night.

If you have a loaded gun now is the time to fire at some of these bargains.

Saturday, June 23, 2007

Genentech Contraction

It is nice to be right for a change!

Back in April I recommended waiting for multiple contraction before buying into Genentech (DNA.) Well the contraction happened with DNA dropping from the low 80s to $75 with no specific bad news to explain the fall.

DNA certainly looks attractive at these levels. A 2008 PE of 22 is not bad for a company which grew EPS at 61% in the last quarter. Of course the real benchmark is sustainable revenue growth and this is where DNA starts to fall short. US product revenue growth in the last quarter was 30% but take out the new revenue from Lucentis and this falls to 16%. So assuming that once the launch for Lucentis is anniversaried it keeps growing, US revenue growth could be down to 20%.

Of course with MG&A expenses growing slower than revenue and an ongoing share buy back program, EPS growth should be higher than revenue growth. So assuming EPS growth of 25% DNA looks fairly valued.

However if DNA can expand the labels for existing drugs or launch a new one its valuation starts to look like a bargain. Although there are no new blockbuster drugs on the immediate horizon, both Avastin and Herceptin could receive new indications in the next year. There are over 10 Phase III trials of Avastin ongoing at present so DNA certainly has confidence that its use can be expanded.

In summary DNA looks worth accumulating at these levels. There may still be more multiple contraction in the short term but it is hard to see it falling much below $70.

Do yourself a favour - pick up some DNA for the long term.

Wednesday, June 13, 2007

Banking on banks

After taking advantage of RBS's recent slump in share price I am now officially overweight on banks.

A good place to be. Add a typical 4% yield to 10% annual earnings growth (and matching share price rise) and you get an average total return of 14% for very little risk.

The downside of my strategy is that bank stocks tend to move together so you can end up having some very bad days. Yesterday was a good example with HBOS down 3.5%, RBS down 2.5% and Lloyds TSB down 1%. Ouch!

HBOS' plunge was due to a trading update that stated that their share of the mortgage market had dropped from over 15% to under 10%. This was due to a management strategy to retain mortgage customer rather than gain new ones. This strategy did not work very well! HBOS think they can recover their share to over 15% by the end of the year. If they succeed then the current price is a good buying opportunity as the 2007 PE is under 10.

I guess the other problem with being overweight banks is that when opportunities to top up appear you can't as you have already done all your topping up.

Not to worry. My bank shares add yield and stability to my portfolios and I am not letting go of them easily.