Wachovia (WB)

Wachovia is trading at a $5.50/share premium to tangible capital/common share of ~$14.50, calculated as follows:

• Common Share Count: 2,138 million (1,992 at quarter-end plus 146 issued in April)
• Tangible Capital: $31.0 billion (quarter-end book value of $78.0 less intangibles of $45.1 and preferred of $5.8, plus proceeds of $3.9bn from common issued in April)

This premium represents 4.3% of low-cost deposits of ~$278 billion, below the minimum premium of 5% an acquirer would likely pay. This value-based analysis fails if you believe write-downs and credit losses will absorb the entire go-forward earnings power of Wachovia (because then book value will fall further).

I do not think this likely (and will post later on why) hence WB looks like a buy to me.

Wachovia said it set aside $2.83 billion for credit losses - that’s up from $177 million a year earlier and nearly twice the $1.5 billion the banking firm set aside in the fourth quarter. Net charge-offs (loans it doesn’t expect to be repaid) quintupled from a year earlier, reaching $765 million.

To conserve $2 billion a year in capital, Wachovia is slashing its quarterly dividend 41%, from the current 64 cents all the way down to 37.5 cents per share. To raise capital, Wachovia will include public offerings of common and convertible preferred stocks.

The company ended the quarter with a Tier-1 capital ratio of 7.5%, up from 7.4% at year-end, and well above the 6% level that regulators say indicates a bank that is considered to be "well-capitalized."

The ratio measures a bank’s ability to cover losses.

Streamlined Infrastructure :Compared to the larger competitors, Bank of America, and Citigroup, Wachovia has a history of choosing new industries selectively. By focusing its operations on the highest growing regions, Wachovia has been a traditional strong performer.

Cost Cutting Works : At year-end 2006, Wachovia was more than half-way to its goal or reaching the $1 billion mark in annual cost saves. The firm is expected to meet the goal in June of 2007.

Low Default Rate : Alongside the exit in the sub-prime loans market, Wachovia has held onto clients that continue to pay their loans on time, thereby experiencing a low default rate.