Norwest Corp. may be one of the best banks out there, but investors have been crushing its stock even harder than other banks' shares lately.
Shares of the Minneapolis bank company have plummeted 19% since Oct. 8, the worst performance among superregional banks during that period. Among the 35 banks followed by Morgan Stanley & Co., the average decline was 8%. The S&P 500 has gained 1% in the past two months.
"Norwest surprises me," said Miles P.H. Seifert, chairman of Gray, Seifert & Co., New York-based money managers. "The performance is fantastic, but investors keep hammering the stock."
From $28.375 a share Oct. 8, the stock price has been pulled by the selloff down to $23, unchanged Monday.
Daunting Price Ratios?
Analysts and money managers said that the selloff's harshness may be related to the shares' lofty price-earnings and price-to-book ratios.
"The ones with the higher multiples got beat up more," said Michael Milunovich, an analyst at Robert W. Baird in Milwaukee. "Investors are more concerned about what appears to be pricey. They don't look at whether the performance justifies the price."
In early October, Norwest's price-earnings ratio on 1994 estimated earnings was 13. Now, it's down to 11, according to Mr. Milunovich, whose 1994 earnings estimate is $2.45 a share, right around the consensus estimate.
The shares sell at slightly more than twice book value.
Maybe it's just Norwest's time to get hit. The recent selloff has allowed its shares to fall into line with the rest of the out-of-favor superregional group. Morgan Stanley's 35 banks are off 13% since their April highs. Norwest's shares are off 12%.
Norwest said its shares are lumped together with those of other banks, which have fallen out of favor as investors seek industries with better prospects for strong earnings growth.
Robert Strickland, a spokesman, said, "We are concerned that people are painting the industry with a broad brush, overlooking companies with strong fundamentals, with opportunities for growth in fees and net income."
If that's so, Norwest isn't alone.
Other high-priced stocks of quality bank companies have suffered considerably since banks released their third-quarter earnings. Banc One Corp.'s shares are off 13%, for example, and Wachovia Corp.'s shares dropped 14.9%.
The puzzling part of the Norwest selloff is the fact that the bank has never performed better. For five years, its earnings per share have increased 13.7%. In the past two years, that growth rate was been 20%.
The bank expects this growth to continue at a 13% rate for two years. Only Fifth Third Bancorp, with 14% growth projected in earnings per share, may have a better performance in the industry.
Return on equity has been more than 20% for the past three quarters, the best performance among the regional banks that Morgan Stanley follows. For the past five years, average ROE was 18%.
Employees are encouraged to keep up the good work. Whenever ROE exceeds 18%, they get a 12% bonus.
Hefty Fee Income
The bank gets 40% of its revenue from fees, primarily from its big mortgage and consumer finance companies. Only 5% of earnings comes from lending to large corporations. The rest comes from retail business.
Through its finance and mortgage companies, the bank is in all 50 states and has recently branched out into all 10 Canadian provinces.