Rating Update: Stock Rating B-Positive (5/13/19)-CIT Group Inc (CIT).

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BUSINESS

CIT Group Inc. operates as the bank holding company for CIT Bank, National Association that provides banking and related services to commercial and individual customers. The company operates through three segments: Commercial Banking, Consumer Banking, and Non-Strategic Portfolios (NSP). The Commercial Banking segment offers lending, leasing, and other financial and advisory services primarily to small and middle-market companies; factoring, receivables management products, and secured supply chain financing; and equipment leasing and secured financing to railroads and non-rail companies. The Consumer Banking segment provides mortgage loans and deposits.
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INVESTMENT RATING

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CIT’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to be Value Creation neutral.

CIT has a current Value Trend Rating of B (Positive).
This rating combines highly consistent signals from two proprietary PTR measures of a stock’s attractiveness. CIT has a slightly positive Power Rating of 63 and a slightly positive Appreciation Score of 67, leading to the Positive Value Trend Rating.

CIT’s stock is selling well below targeted value. The current stock price of $49.72 compares to targeted value 12 months forward of $78.
This moderately high appreciation potential results in an appreciation score of 67 (only 33% of the universe has greater appreciation potential.)
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CIT has a Power Rating of 63. (This slightly positive Power Rating indicates that CIT’s chances of achieving attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly positive Power Rating include: the recent trend in CIT’s earnings estimates has been extremely favorable; and recent price action has been neutral. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

CIT’s financial strength is below average. Financial strength rating is 40.
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Relative to the S&P 500 Composite, CIT Group Inc has significant Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that CIT is extremely high risk. All factors are relative weaknesses. Relative weaknesses for CIT include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, high financial leverage, low historical growth, and high earnings variability. CIT’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. CIT has unusually low market capitalization.

CURRENT SIGNALS

CIT’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; and rising leverage.

CIT’s current technical position is mixed. The stock price is in a 4.4 month up move. The stock has appreciated 44.5% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Recent notable negative changes in investment behavior have affected CIT Group Inc (NYSE: CIT): negative upside/downside volume developed.
CIT Group Inc (NYSE: CIT) has benefited from minimal positive changes in fundamentals: significant quarterly earnings acceleration occurred.
The stock is currently rated B.
On 5/13/19, CIT Group Inc (NYSE: CIT) stock suffered a major decline of -16.7%, closing at $0.25. However, trading volume in this decline was exceptionally low at 48% of normal. The stock has performed in line with the market over the last nine months and has declined -6.8% during the last week.

CASH FLOW

In 2018, CIT generated a significant increase in cash of +$327 million (+17%). Sources of cash were larger than uses. Cash generated from 2018 EBITDA totalled +$1,351 million. Non-operating uses consumed -$24 million (-2% of EBITDA). Cash taxes consumed -$165 million (-12% of EBITDA). Withdrawal of investment from the business totalled +$2,221 million (+164% of EBITDA). On a net basis, debt investors received -$1,210 million (-90% of EBITDA) while equity investors removed -$1,846 million (-137% of EBITDA).
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CIT’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Cit Group Inc Peer Group. In most years, CIT was in the second quartile and third quartile. Currently, CIT is slightly above median at -2% of EBITDA (-$24 million).

CIT’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Cit Group Inc Peer Group. In most years, CIT was in the second quartile and top quartile. Currently, CIT is at median at -12% of EBITDA (-$165 million).

CIT’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Cit Group Inc Peer Group. In most years, CIT was in the top quartile. Currently, CIT is upper quartile at +164% of EBITDA (+$2,221 million).

CIT’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by an opposite trend for the Cit Group Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has decelerated very sharply.) In most years, CIT was in the lower quartile. Currently, CIT is lower quartile at -90% of EBITDA (-$1,210 million).

CIT’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cit Group Inc Peer Group. In most years, CIT was in the second quartile and lower quartile. Currently, CIT is substantially below median at -137% of EBITDA (-$1,846 million).

CIT’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Cit Group Inc Peer Group. In most years, CIT was in the top quartile and lower quartile. Currently, CIT is at the upper quartile at +24% of EBITDA (+$327 million).
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CIT’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Cit Group Inc Peer Group. (Since 2014 Cash, %Revenue has accelerated very sharply.) In most years, CIT was in the top quartile. Currently, CIT is above median at +67%.

PROFITABILITY

CIT Group’s return on equity has improved very significantly since 2009 accelerating very sharply after the 2016 level.
CIT Group’s very strong positive trend in pretax operating return significantly offset by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of CIT Group’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2016 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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CIT Group’s return on equity is at the upper quartile (8.7%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is slightly below median (1.3%) reflecting asset turnover that is lower quartile (0.06X) and pretax margin at the upper quartile (19.8%).
Tax “keep” rate (income tax management) is at the lower quartile (75.1%) resulting in after tax return on assets that is slightly below median.
Financial leverage (leverage) is upper quartile (9.09X).

GROWTH RATES

There are no significant differences between CIT Group’s longer term growth and growth in recent years.
CIT Group’s historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 2.1% per year.

Total asset growth has been 7.4% per year.

Annual E.P.S. growth has been 18.8% per year.

Equity growth has been 3.3% per year.

CIT Group’s consensus growth rate forecast (average of Wall Street analysts) is 10.0% — in line with the average of the historical growth measures.
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Relative to the Cit Group Inc Peer Group, CIT’s historical growth measures are erratic. E.P.S. growth (18.8%) has been upper quartile. Total asset growth (7.4%) has been slightly above median. Revenue growth (2.1%) has been substantially below median. Equity growth (3.3%) has been at the lower quartile.

Consensus growth forecast (10.0%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, CIT Group’s stock price performance has been variable and below market. Between December, 2009 and May, 2019, CIT Group’s stock price rose +80%; relative to the market, this was a -29% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 2.4% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through April, 2019 of 2.4% is at median relative to CIT Group Inc Peer Group.

Current 5-year total return performance of 5.9% is substantially below median relative to the S&P 500 Composite.
Through April, 2019, with substantially below median current 5-year total return of 5.9% relative to S&P 500 Composite, CIT’s total return performance is above median relative to CIT Group Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, CIT’s overall valuation is quite low. Four of five factors are upper quartile. The highest factor is the ratio of enterprise value/revenue, followed by the ratio of enterprise value/earnings before interest and taxes, then by the price/earnings ratio, then by the price/equity ratio. The lowest factor, ratio of enterprise value/assets, is lower quartile.
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CIT has a major value gap compared to the median valuation. For CIT to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.29X to 1.43X. If CIT’s ratio of enterprise value/revenue were to fall to 1.43X, its stock price would be lower by $-63 to $-13.
For CIT to fall to lower quartile valuation relative to the CIT Group Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.29X to 0.90X. If CIT’s ratio of enterprise value/revenue were to fall to 0.90X, its stock price would decline by $-81 from the current level of $50.

VALUE TARGETS

CIT’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to be Value Creation neutral.
CIT Group’s current Price Target of $84 represents a +69% change from the current price of $49.72.
This moderately high appreciation potential results in an appreciation score of 67 (only 33% of the universe has greater appreciation potential.)
Reinforcing this moderately high Appreciation Score of 67, the moderately high Power Rating of 63 contributes to an Value Trend Rating of B.
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CIT Group’s current Price Target is $84 (+17% from the 2018 Target of $72 and +69% from the 05/13/19 price of $49.72). This slight rise in the Target is the result of a +15% increase in the equity base and a +2% increase in the price/equity multiple. The forecasted increase in return on equity has a large positive impact on the price/equity multiple and the forecasted increase in growth has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 9.2% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2011 low of 4%.

PTR’s growth forecast is 8.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2012 and 2018. The current forecast is well above the 2013 low of 0%.

PTR’s cost of equity forecast is 8.2% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic increase between 2010 and 2018. The current forecast is steady at the 2011 low of 6.6%.
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At CIT Group’s current price of $49.72, investors are placing a negative value of $-17 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 3.0% per year, and a return on equity of 8.2% versus a cost of equity of 7.0%.
PTR’s 2020 Price Target of $84 is based on these forecasts and reflects an estimated value of existing assets of $74 and a value of future investments of $10.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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