Wachovia: Buyable?

Is Wachovia (WB) buyable?

- Goldman Sachs notes the good news is that Wachovia has a new CEO. The bad news is that nearly half of the ~$8bn of capital raised in April has already evaporated. If they set aside the good news, the conclusion from the bad news is that more capital is required and the easiest and least expensive source has to be a cut to the dividend, which is still sizeable at $3.2bn annually.

While the stock may be up on the initial CEO announcement, the real outlook hinges on capital. This quarter's loss of $1.23 to $1.33 per share implies that WB will be cumulatively unprofitable since the credit crunch began. Given a lack of profitability and declining capital ratios, a dividend cut is likely while a broader capital plan may include asset/business sales. A goodwill write-down will also come to recognize that Golden West is impaired, but valuation and capital are both based on tangible book.

WB trades at 1.1X GSCO estimate of 2Q tangible book value. Firm's 12-mos DCF price target is $20. Maintains Neutral.

- RBC Capital believes Wachovia's stock will likely remain under pressure until credit quality stabilizes, the timing of which will likely take place in 2009. Under the leadership of its new CEO, they expect the company to incur a significant charge to "clean-up" its problems once and for all, eliminate its dividend and raise additional capital.

- Ladenburg thinks the hiring of Robert Steele will keep alive the belief that Goldman Sachs (GS) will acquire WB.

Firm's 12-month price target of $13 represents an estimated 75% of estimated tangible book value which is well above the 30% level the "Ground Zero" banks traded down to in late 1990-early 1991. Rating is unchanged at Sector Perform with Average Risk.

Notablecalls: I must say I have to take the opposite view here. I suspect Steel wanted some decks cleared before (write-offs) coming in. A guy coming from Goldman Sachs wants to keep looking good.

That makes WB buyable here just under $13.

Comments

[Eric Frantz]

I think that WB is a good long term buy, but I believe that in the short term the stock will continue a little further downward. Warnings about lingering effects of the credit crunch also make me wary.

[Alwayswondering]

Do you think it is worth while to wait until they cut the dividend, since that seems to be there next play? Or is it likely to bounce from here and not drop as low as this point after they cut the dividend?

In other words does it make sense to buy now, when everyone suspects that they will cut the dividend, ie it is built in the stock price already, or will the event still shock the stock?

[mythoughts]

Always Wondering! You worry too much so stay away from WB.

[mallarde]

I hope they cut the dividend. Diluting shareholders and using this money to pay out dividends seems inefficient and desperate.

I would much prefer that they slash the dividend. Why pay out profits WB does not have?

[WBalumni]

Because of promises made to the long term investors and retirees that rely on that dividend. Unfortunately, WB management lost sight of these continued promises and representations and began trying to grow their way into a home run. They were intoxicated by the mid fifties stock price. On the other hand, many insiders saw this as an aberration and sold in the high fifties while investor relations was touting that WB should be worth $60 in short order. Unfortunately not enough of us acted on this counter indicator and have paid a high price.