Wednesday, August 8, 2012

Franklin Financial Services, Chambersburg, PA (FRAF)

The Case of a Deeply-Rooted Pennsylvania Money Tree


If you're looking for a safe place to earn a solid dividend at a bargain price, Franklin Financial Services might just be your money tree. You can buy this undervalued bank's stock today at $13.60, earn a 5% dividend for the foreseeable future, and obtain a reasonable chance of doubling your money.

Disclosure: As of this posting, I own shares of FRAF and may subsequently either dispose of them or purchase more.

Prospective Buyers
F.N.B. Corp, Hermitage, PA (FNB)
M&T Bank Corp, Buffalo, NY (MTB)
PNC Financial Services, Pittsburgh, PA (PNC)
Financial Snapshot
(as of 3/31/2012)

Total assets:
$1.067B
Book value per share:
$21.75
NPAs to assets:
3.9%
Price to book:
66%
Market cap:
$56M
Dividend yield:
4.9%
Trailing 12-month return on assets:
0.6%
Trailing 12-month return on equity:
7.1%
The Crew
G Warren Elliott, Chairman
William Snell Jr, President and CEO
Mark Hollar, Senior VP, Treasurer, and CFO
The Skinny
How undervalued is FRAF's stock price?
  • Over the past 12 months, the KBW Bank Index climbed 12.2%, while FRAF stock fell 17%
  • The average bank in the KBW Index trades at 124% of book value, while investors can now buy FRAF at 61% of book value
  • The average bank in the KBW Index trades at 15x earnings, while FRAF is trading at 8x earnings
  • Therefore, Franklin Financial Services is effectively trading at a 50% discount 
Why is FRAF so cheap?
  • Most investors have never heard of it
  • FRAF recently cut its dividend so many people who did own it appear to be selling
  • Current EPS of $1.60 is well below historical level of $2.50
  • NPAs were still rising in Q1 and may not have peaked
  • Brokerage firms do not appear to be following FRAF
What would make the stock price double?
  • When NPAs start to decline…
  • Then earnings and book value will grow…
  • And people will start to trust that the dividend will not be cut again…
  • Then FRAF could trade at book value 
What makes this stock relatively safe?
  • 
The bank has been around for over 100 years and is very conservative
  • Its managers don’t pay themselves exorbitant salaries or take big risks
  • It has maintained profitability through the Great Recession
  • It never took TARP
  • Regional unemployment is significantly below the national average
      Sources

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