VALUE INVESTING
Bradford & Bingley

By Stephen Bland (TMFPyad)
March 9, 2001

The well-known name of Bradford & Bingley (LSE: BB.) is the latest of the former building societies to float on the market, the event taking place towards the end of last year.

Let's go straight into the usual fundamentals:

• Share price 298p
• High/low since float 316/244
• Market cap £2,032m
• Earnings per share year ended 31/12/00 21.8p normalised
• EPS lowest recent forecast year ending 31/12/01 25.0p
• EPS lowest recent forecast year ending 31/12/02 29.4p
• P/E ratio historical 13.7; on 2001 forecast 11.9; on 2002 forecast 10.1
• Yield forecast year ending 31/12/01 4.2%
• Price/tangible book 1.8
• Directors own 0.01%

My source does not give the gearing figure for banks and other financials, the reasoning being that since their stock in trade is cash anyway the debt is not important. I do not agree with this, but at the time of writing I have not the full figures to hand.

Also, I have not quoted relative strength data in view of the very short period of a few months the company has been on the market.

One way to look at B&B is by comparing it with other banks in the sector. It is the second smallest of the twelve constituents, way behind the leaders and too small even to join the FTSE 100 index. However it has the lowest P/E in the sector, combined with a decent potential growth rate as can be seen from the forecasts above. Actually Egg (LSE: EGG) has a lower P/E but it is negative due to losses so I am not counting that.

Its yield is the third highest in the sector and price/tangible book ratio is the lowest in the sector. On the three common value tests of P/E, yield and P/TB, then, the company on balance shows up as one of the best value shares among all the banks. But that alone does not make it a value share generally, we have to compare with the wider market to pass that test. However the sector comparison in this case does give some important indicators.

Banks generally trade on fundamentals much cheaper than the general market averages, showing higher yields and lower P/Es for example. Not always but far more often than not. They certainly do at present. It follows that on the face of it, there may not be much logic in comparing banks with the market because their norm is well below it anyway. But B&B is out of line, both with the sector and by the relationship of the sector to the whole market.

Let's sniff around a bit and find out why this might be. B&B is a mortgage bank, not a clearer or international banker. As I have said it is pretty small, about the same as its competitor Northern Rock (LSE: NRK). Smaller non-FTSE 100 banks will immediately attract less institutional interest than their massive counterparts in the sector. This will generally depress their fundamentals.

Another point against B&B and the other mortgage banks is the possibility of a slowdown in mortgage lending and/or reduced margins resulting from an interest rate war. All wonderful news for a value investor, provided we can find a company depressed by this sort of bad sentiment, yet in reality unaffected to any appreciable extent by it. We may have found one.

Directorspeak is positive. Upon announcing the 2000 results this was said:

"Our focus on broking and lending will enable us to continue to make good returns for our shareholders."

Not bad, if not the most positive statement ever. But if you wish to speak director you have to consider the industry. Bankers and brewers for example are conservative, anything vaguely positive is quite good news.

B&B looks attractive. The company has a fine EPS growth record. For 1997 this is given as 11.5p normalised growing unbroken up to the 21.8p figure for 2000, and on to the lowest forecast of 25.0p for 2001. Incidentally the consensus is 27.7p.

Assuming the forecasts are anywhere near accurate -- always a risk with value -- B&B may turn into a nice play. As usual patience is required.

A secondary point is the perpetual bid speculation that surrounds these mortgage banks. The Lloyds TSB (LSE: LLOY) recent bid for Abbey National (LSE: ANL) is a case in point, the latter being far bigger than B&B. A while back Barclays took out Woolwich. However never buy a value share on bid speculation alone: it has to make sense on the fundamentals. The point is with good value shares that bid prospects come with the territory anyway because the same features that make it attractive to us, make it attractive to a potential bidder.

The author does not hold shares in B&B – yet.

More: Bradford & Bingley discussion board