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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

PNC Financial

January 21st 2011 PNC Financial
NYSE Symbol: PNC
Industry: Bank
Price as of 1/21: $60.83


The earnings keep coming in better than expected, but with eight straight up weeks, the major averages are succumbing to some much needed profit-taking. A down week or two in my opinion would actually be healthy for the broader market to push higher in the coming months. One sector that analysts and investors are bullish on for 2011 is the financials. Many of the financials are reporting better than expected earnings including GE which jumped 7% on Friday to a new 52 week high. Not bad. This week we'll feature a blue chip bank that reported better than expected earnings, but witnessed its' stock pull back a couple of percent. The featured stock of the week is the nations' sixth largest bank, PNC Financial. With the recent pull back in the stock, investors have an opportunity for an attractive entry point with limited downside and plenty of upside in the coming years with a big dividend hikes on the horizon.

The Pittsburgh-based bank earned $820 million, or $1.50 per share, easily beating estimates by 12 cents. That compares with a profit of $1.1 billion, or $2.17 per share, a year ago, which included a gain of $1.49 per share on BlackRock's acquisition of Barclays Global Investors. Revenue fell 20 percent to $3.9 billion from $4.9 billion in the prior-year period due to a $1.1 billion gain related to the BlackRock-Barclays deal. For the full year, PNC reported net income to common shareholders of $3 billion, or $5.74 a share, up from $2 billion, or $4.36 a share, in 2009. PNC's loan book expanded in the fourth quarter to $151 billion, down 4 percent from the year earlier period, but up $500 million from the third quarter. That's a good sign. But PNC, like other banks such as Citigroup and JPMorgan Chase, is benefitting from better credit trends. They set aside less money for bad debt, $442 million versus $1 billion last year as fewer borrowers defaulted on their loans. Net charge-offs, the loans banks write off as uncollectable after three months, fell to $791 million from $835 million in the same period last year. Loans 30 days or more past due dropped to $1.4 billion from $2.4 billion at the end of 2009. Asset management fee income totaled $303 million in the fourth quarter, increasing 22% from the previous quarter and 38% year-over-year. Corporate Services fee income totaled $370 million during the fourth quarter, double the level in the third quarter and increasing 42% from a year earlier. Consumer Services fee income was $322 million during the fourth quarter, a slight decline from the previous quarter but an increase of 2% from the fourth quarter of 2009. PNC reported record capital levels as of year-end, with a Tier 1 common equity ratio of 9.8% and a regulatory total risk-based capital ratio of 15.6%. The CEO indicated that as 2011 unfolds, they see opportunities for growth and the potential to drive even greater value for shareholders. So the trends are moving in the right direction once again for PNC and the other financials.

The recent pull back is providing a good buying opportunity. Currently the stock trades for 10.8 times 2010 earnings and less than 10 times 2012 conservative estimates. The stock also trades for a little over 2 times sales and just over one times book value of $56 a share. Currently the stock only provides a 40 cent dividend, but PNC and most of the other major banks will be boosting their dividends dramatically in the next quarter when the government gives them the okay. With PNC trading just above book value it seems to have limited downside with plenty of upside when more normalized earnings and economic growth materialize.