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Published: May 18, 2010
The Greek debt crisis sent the world's financial markets
reeling, particularly across the so-called "PIIGS" nations in
Europe -- Portugal, Italy, Ireland, Greece and Spain, five
European countries considered to be in the most questionable
financial shape.
The fear is that Greece's debt problems might be just the
beginning: In the financial world the fear is usually not about
whatever's happening but how what is happening is going to
affect everything else. The EU bailout, however, helped allay
concern and markets across Europe, as well as European stocks
trading on American exchanges.
No one knows if this is just a temporary reprieve. In the
meantime, however, what is perfectly clear is that the crisis
has made some strong companies very cheap. Every sell-off
creates bargains, and this one has created a whopper.
Banco Santander (NYSE: STD) is the largest bank in Spain
and the third most profitable bank in the world. It derives 65%
of profits from Europe and 35% from Latin America. (Spain
accounts for about a quarter of the take.)
Santander pays quarterly dividends that have totaled $0.76
during the past 12 months, which translates to about a 7% yield.
Dividends are paid in euros and converted to dollars for U.S.
shareholders, so there is
currency risk. But that potential negative certainly has a
positive side: Santander is also a way to diversify away from
dollar-denominated holdings.
Santander fell more than -30%, from $14.77 in mid-April to
under $10 in early May. The problem has been its exposure to
Spain.
Spain is in a deep recession brought on by the collapse of the
housing industry. Unemployment is more than 20%. Based on lower
estimated GDP growth and higher fiscal deficits relative to its
European peers, Standard & Poor's lowered the country's
sovereign debt rating to "AA+" from "AAA" in January 2009.
S&P lowered the rating again in April, this time to "AA" with a
"negative" outlook.
S&P also reduced its estimate of Spain's five-year estimated
average GDP growth rate to +0.7%, from +1.0%. S&P said it
considered the possibility that Spain's public and private
borrowing cost would rise as a result of downgrades, further
slowing growth.
Santander shares fell as a result of the bank's exposure to the
Spanish economy. Then the crisis in Greece came along. Now, the
selling appears to have gone too far. Judging by the drop in its
stock price, you'd think Santander did all its business in
Spain. That's not the case: Three-quarters of its business is
outside of Spain, including about 35% from fast-growing Latin
America, where Santander has a greater
market share than any other bank.
Largely because of its geographic
diversification, Banco Santander was not obliterated during
the global financial crisis. Prudent management and tough
domestic regulation helped it steer clear of the toxic assets
that were so disastrous to other large banks in the United
States and Europe.
In the first quarter ended March 31, Santander exceeded
analysts' expectations. Profits rose +5.7%, to 2.22 billion
euros. Profits were driven by growth in Brazil and higher net
interest income from lower interest rates. Profits were flat
for 2009 versus 2008, but that amounts to a solid and resilient
performance given the global recession. These are not the
financial results of a bank that's struggling amid the weak
Spanish economy.
The crisis in Europe could continue, and stocks could continue
to fall. Buying good companies that are out of favor, however,
has proven to be a good strategy during the long run. Part of
buying an out-of-favor stock is risking further downside. But,
Santander is a good, solid bank with strong prospects for the
future, as 44% of revenues are earned in emerging markets.
Action to Take --> Consensus
analysts' estimates are for Santander to grow earnings more than
+18% next year and by a strong average of +12.4% during the next
five years. And, the bank is dirt cheap. The stock currently
sells at less than seven times projected 2009 earnings and
yields 7%. Longer-term investors should take a close look.
-- Tom Hutchinson
Staff Writer
StreetAuthority |
