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CIT Group (NYSE: CIT) is a company with a battered history. The lending company suffered a meltdown during the financial crisis and went belly up in November 2009 – then quickly emerged from bankruptcy in December of that year.
Now, after nearly a half decade of acquisitions, is CIT Group in trouble again?
The stock is already off 28% year-to-date. At around $28 a share, this is the cheapest we’ve seen CIT Group since it emerged from bankruptcy.
However, this could all be a big misunderstanding – at least on the market’s part. CIT is trading at just 50% of book value, a deep discount to other credit servicing companies. It’s also a far cry from the 150% of book value that CIT traded at prior to the financial crisis.
Meanwhile, the stock is also offering a 2.1% dividend yield. So why has CIT Group been beat down so much?
Post-Bankruptcy Overhang
While the Great Recession forced CIT Group into bankruptcy, it emerged much better financed. The company got caught up in the financial crisis due to its large mortgage exposure. In particular, its funding base provided little liquidity and it ultimately become insolvent very quickly.
The company has managed to refinance its debt to lower levels. However, it’s also been growing its asset portfolio, which has led to more regulation and higher costs. But even after years of acquisitions, CIT Group is still well financed, with almost all of its loans being asset-backed.
One of the big overhangs for CIT isn’t just its size and regulation, but the worry that the fallout from low oil prices will impact the lender. In particular, bankruptcies and tight cash flows could lead to loan defaults. Yet it’s worth noting that it has little exposure to the energy markets; less than 5% of its loans are energy related. Plus, those loans are asset-backed.
Catalyst
We could have a catalyst on the horizon to close the valuation gap and get CIT Group shares higher. A relatively new activist hedge fund, run by former JPMorgan Chase (NYSE: JPM) executives, is pushing the company to split up.
The fund, Hudson Executive Capital, owns 0.5% of the company. The thesis is that CIT Group should sell off underperforming parts of the business to better streamline operations. This would also allow CIT Group to lower its regulatory costs. This is a similar move that many financial companies are looking into – including American International Group (NYSE: AIG), which is facing fresh pressure from Carl Icahn.
While CIT Group CEO John Thain has pushed back against a breakup, it’s worth noting that he is retiring at the end of March. What’s more is that CIT has already said it’s looking into a sale or spinoff of its commercial air unit.
But more could be done. This includes the opportunity to also sell off the rail business and lending operations. CIT Group has a complicated business structure that could certainly use some streamlining. Its core business is lending, but it also owns planes and railcars that it leases to airline and railroad companies.
There is a precedent for slimming down as well. General Electric (NYSE: GE) has been selling off assets to streamline operations and has seen its shares rise 16% in the last 12 months. CIT Group has some similar assets that could be attractive to bidders that lost out in the GE asset sales.
Many investors aren’t quick to forget the fact that CIT Group shares went from $60 to $6 in less than a year back in 2007-2008. However, the key is that this is a much different company today. It’s out of the mortgage business and is in the equipment business – and has little exposure to the low oil price fallout. Its loan portfolio is backed by assets and yet it trades at just 50% of book value.
A breakup should help highlight the value of CIT Group’s portfolio as it focuses on its core business.
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