Washington Mutual's Stock Is Seen as Undervalued

Washington Mutual Inc. deserves attention as an undervalued stock, an analyst says.

Shares of the Seattle thrift, which have underperformed as the company digested four acquisitions, should be viewed as a bargain at current prices, said Thomas O'Donnell, a thrift analyst at Salomon Smith Barney.

The stock closed at $41.375, up 31.25 cents. However, Mr. O'Donnell thinks the stock should hit $52 within 12 months, according to a Salomon Smith Barney estimate.

Mr. O'Donnell said Washington Mutual's strong loan originations, solid credit quality, and increased fee income demonstrate that the thrift is on track.

In the fourth quarter the thrift's loan originations were $15.5 billion, up from $9.8 billion a year earlier; its net interest margin was 2.85%, down 9 basis points; and depositor fees were $163.6 million, up from $126 million.

Washington Mutual has endured criticism from Wall Street in the wake of acquiring four large California savings and loans, Mr. O'Donnell said.

But Mr. O'Donnell contended that "the bear case was wrongheaded." Washington Mutual, which now has $165 billion of assets, "simply moved quickly to take advantage of the unique opportunity it had to build a very attractive and very large California franchise," he said.

The flat yield curve, which is proving difficult for other thrifts to deal with, is offering opportunities for Washington Mutual, he said. The company is lowering funding costs, stepping up originations of consumer loans, buying mortgage-backed securities, increasing fee income, and selling its fixed-rate loans into the secondary market.

But not everyone is talking up Washington Mutual's stock.

Strategist Jeffrey Applegate on Monday removed the shares from Lehman Brothers' model investment portfolio. He said he also was shedding BankBoston Corp. and Citigroup, while adding BB&T Corp., Fifth Third Bancorp., Firstar Corp., and Mellon Bank Corp.

The Lehman portfolio weighting remains at 20% for financial stocks, versus 14% of the Standard & Poor's 500.

In Monday's market, big banks regained some of the ground they lost in last week's selloff. Chase Manhattan Corp. was up $2.5625, to $74.4375; Citigroup $1.5625, to $53.1875; and J.P. Morgan & Co. $1.125, to $104.25.

Among regionals, Fleet Financial Group was up $1, to $43.9375; KeyCorp lost 31.25 cents, to $30.75; and PNC Bank Corp. added $1, to $48.625.

The S&P bank index added 0.93% and the Dow Jones industrial average was up 0.91%. The Nasdaq bank index gained 0.80% and the S&P 500 added 0.72%.

CNB Bancshares, Evansville, Ind., was up 75 cents, to $42.25, on word that it was in talks to acquire crosstown competitor National City Bancshares for $590 million. National City rose 87.5 cents, to $18.6875.

GBC Bancorp., Los Angeles, added 6.25 cents, to $23.0625, after a downgrade to "hold" from "accumulate" by Charlotte Chamberlain at Jeffries & Co., Los Angeles.

Ms. Chamberlain reduced her 1999 earnings per share estimate by 5 cents, to $2.15, and her 2000 estimate by 15 cents, to $2.40. She said the reductions reflect higher levels of nonperforming loans and tightening spreads.

"While the shares present little downside risk, we can't identify a catalyst to spark above average share price performance over the near term, Ms. Chamberlain said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER