I recently spent some time dissecting The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
However, a quick check can help determine whether a company might be worthy of a look using Graham's teachings. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and a maximum P/B of 1.5. With that in mind, I screened the stocks of the S&P 500 that met those requirements and was presented with 56 companies. I will be making a CAPScall on most of these companies after comparing them with competitors and their current value in relation to their Graham numbers. Up next is regional bank M&T Bank (NYS: MTB) .
Buffalo, N.Y.-based M&T Bank is a favorite among Northeast regional banks. The bank traces its history to 1856 and is now one of the 20 largest bank holding companies in the United States. Despite an earnings hiccup caused by a one-time charge, M&T Bank saw a 12% earnings increase during 2011 and has been identified as a bank to own in 2012. While not included on the Federal Reserve's list of 19 "stress test" banks, M&T Bank did pass a parallel Federal Reserve stress test. By passing this test, it doesn't have to take further actions to raise capital, though it would need the Fed's permission to raise its dividend beyond its current $2.80 a share.
What's it worth?
When compared with other financial companies of similar market cap, including previously profiled KeyCorp (NYS: KEY) , M&T Bank has the least room to grow of all the companies, except for Northern Trust (NAS: NTRS) , which is overvalued according to its Graham number:
Book Value Per Share (MRQ)
SunTrust Bank (NYS: STI)
Sources: Yahoo! Finance and author's calculations
All but Northern Trust trade below their Graham numbers. The New York bank is feeling the pinch of low interest rates, prompting it to cut 700 jobs in an attempt to boost profits. SunTrust, one of the worst-performing banks of 2011, looks to bounce back in 2012 and is attempting to do so by once again lending money. Nevertheless, its above-average performance could make it an interesting choice among smaller banks.
As a large bank a step down from the "too big to fail" banks, M&T Bank provides a great alternative to investors interested in the financial sector. Therefore, I will be maintaining a "thumbs up" over on my CAPS page to track this call and keep myself accountable.
M&T Bank may not be the only opportunity to profit from smaller banks. Many investors are interested in bank stocks, including Warren Buffett himself. Our special report "The Only Stocks the Smartest Investors are Buying" explains why Buffett would buy one bank in particular were he a smaller investor. Get your free copy today.
At the time thisarticle was published Fool contributorRobert Eberhardholds no position in any company mentioned. Check out hisholdings and a short bio, orfollow himon Twitter. The Motley Fool owns shares of KeyCorp. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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