6 BARRON’S July22,
nearly$10,afractionofthe2014highof$80.
SouthwesternEnergy,anaturalgaspro-
ducer, has seen its shares fall over 50% in
the past 12 months, to $2.50, due to weak
gas prices, which are down 20% this year.
Its7½%bondsduein2026tradearound
cents on the dollar and yield 9.25%. It has
moderatedebtof$2.3billionandamanage-
able debt to annual cash flow ratio of two.
T
OP EUROPEAN BANKS HAVE FALLEN
well behind their U.S. peers in
the past five years, with many
trading closer to multiyear lows
than highs.
The result: Six leading European
banks—UBS (UBS), Credit Suisse Group
(CS), Barclays (BCS), BNP Paribas
(BNP.France), Société Générale
(GLE.France), and Deutsche Bank (DB)
now have a combined market value of
around $200 billion, less than that of Bank
of America (BAC) alone.
Thesixtradecheaplyat0.3to0.9times
tangible book value against a range of one
to two for the big U.S. banks: Goldman
SachsGroup (GS)andCitigroup(C)areon
the bottom, with JPMorgan on top.
European banks have weaker returns
and face pressure from low to negative
short rates and government bond yields.
The group is worth a look, however, and
DeutscheBankisthecheapestofthebunch.
Itsshares,at$7.70,aredown90%since2007.
Deutsche Bank recently announced a
majorrestructuringprogramandwillscale
back its underperforming international in-
vestment bank and leave a European-fo-
cused commercial bank.
Investorshavebeenskepticalaboutmost
aspectsoftheprogram,includingrevenue,
cost. and return goals for 2022 as well as
whetherthebankcanavoidhavingtoraise
equity capital.
One believer is Douglas Braunstein, a
former top JPMorgan executive and the
founder and managing partner of Hudson
Executive Capital, a large Deutsche Bank
holder. “The company has made the tough
butcorrectdecisionstofocusontheirtradi-
tionalstrengthswhichwillresultinamore
stable, predictable and attractive business
that can deliver sustainable returns over
time,” he says.
Braunstein likes the management team
ledbyChristianSewing,a30-yearveteran
whogotthetopjobayearago.Braunstein’s
viewisthatifDeutscheBankissuccessful,
itcantrademoreinlinewithitsEuropean
peersataround75%oftangiblebookvalue,
against less than 30% now.
Thatwouldmeanthestockwouldmore
than double.
Up & Down Wall Street continued
$510 billion. Some big banks are buying
back10%oftheirsharesannually—ormore.
There is good reason for more aggres-
sivebuybacksbyBerkshiresinceitsshares
lookinexpensive,tradingforjust1.3times
projected second-quarter book value of
$233,000andforabout20times2019earn-
ings, based on Gelb’s estimates. Earnings
are understated because Berkshire counts
onlythedividendsonits$200billionequity
portfolio and carries so much low-yielding
cash.GelbhasanOverweightratingonthe
stock and a price target of $375,000.
Berkshire,amajorpropertyandcasualty
insurer,isbenefitingfrombetterinsurance
pricing this year but that’s not helping the
stock. Many insurers including Travelers
(TRV) are up more than 20% this year.
Berkshireisamongtheworstperformersin
the group.
Rolfe argues that Buffett is too restric-
tiveinhisacquisitioncriteria—hewon’tpar-
ticipateincorporateauctions—andthathis
biggestdealofthecurrentdecade,the$
billionacquisitionofPrecisionCastpartsin
2016, has been what Rolfe calls a “turkey.”
Berkshire doesn’t disclose Precision Cast-
partsearnings,butitsrevenueof$10.2bil-
lion last year was about the same as what
the aircraft-parts maker generated in the
year ended March 2015.
BerkshiregotluckywhenOccidentalPe-
troleum (OXY), desperate to top Chevron
(CVX)inabiddingwarforAnadarkoPetro-
leum(APC),gaveBerkshiresweettermson
$10 billion of preferred stock in April. The
preferredcarriesanabove-market8%divi-
dendyieldplusequitywarrantsworthabout
$1 billion.
“Buffett plays his singular game of ac-
quisitionbyhisinvitationonly,”Rolfewrote.
“This game has turned into solitaire.” A
stubbornBuffettoughttoloosenhisacquisi-
tion criteria and buy back more stock.
O
NE ALTERNATIVE TO BOTTOM-
fishingindepressedstocksisto
buy the companies’ bonds. The
advantage is high yields and
greatersafety—althoughbankruptciesand
corporaterestructuringscanleadtosizable
losses for bondholders.
Two candidates for purchase are Bed
Bath & Beyond (BBBY) and Southwest-
ern Energy (SWN).
Bed Bath & Beyond’s 5.165% bonds due
in 2044 trade for 67 cents on the dollar and
yield8.3%.Acategorykillerinthelate1990s
andearly2000s,thecompanyisfeelingpres-
sure from Amazon.com (AMZN) and other
onlineretailers,butitremainsprofitableand
has modest net debt of $600 million. Its
shares are down 45% in the past year, to
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