Will Restructuring Measures Benefit CIT Group Soon?

We issued an updated research report on CIT Group Inc. CIT on Sep 7, 2015. Livingston, NJ-based CIT Group provides commercial financing & leasing products and services across a wide spectrum of industries, mainly transportation, aerospace & rail, and manufacturing and retail.

The company recently became a $50 billion-plus institution after its acquisition of IMB Holdco LLC, the parent company of OneWest Bank N.A on Aug 3. With this acquisition, CIT Group now operates an Internet banking franchise and a network of 70 retail branches in Southern California as OneWest Bank. Additionally, the company entered into a joint venture with TPG Capital in the same month, thereby strengthening its commercial lending platform.

Deals like these reflect the company’s strength which helped it emerge from bankruptcy in 2009. Notably, the bank’s strength comes on the back of aggressive restructuring of its balance position through repayment and refinancing of high-cost debt. Reduced debt level has facilitated stable capital levels for the company, enabling it to effectively deploy capital to shareholders. Not only did the company raise its dividend by 50% in Jul 2014, but it also has an active share repurchase plan in place.

Further, growth in domestic markets is likely to spur demand for financing of inventories and capital equipments in the upcoming quarters, thereby enabling CIT Group to enhance average earnings asset, which is predicted to grow in a range of 5–10% in the near term. Also, given the company’s initiatives to boost net finance margin, growth in the same is projected within 3.75–4.25% in the near term.

Moreover, the company intends to shed its non-strategic portfolio, which will help lower expenses by $60 million annually. This, in turn, will boost the bottom line.

While the near-term prospects are encouraging, CIT Group’ second-quarter results failed to impress investors. Notably, the company’s profit nosedived over 40% year over year in the second quarter, primarily due to higher provisions and lower revenues. Moreover, acquisition-related expenses led to higher costs during the quarter.

Further, the company remains highly leveraged compared with its peers. Its debt-to-capital ratio stands at 65.12% as against the industry average of just 36.41%. As a result, it has a lower return of equity of mere 6.75% compared with the industry average of 12.10%.

Additionally, CIT Group faces concentration risk as commercial airlines, manufacturing, transportation and service industries make up nearly 70% of the company’s lending base. Also, stricter capital requirement is expected to restrict the company’s financial flexibility, going forward.

Overall, the company’s activities during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for 2015 declined 1% to $2.80 per share, while that for 2016 fell modestly to $3.58 per share.

CIT Group currently has a Zacks Rank #3 (Hold).

Stocks to Consider

Investors interested in the same industry can consider stocks like Euronet Worldwide, Inc. EEFT, Blackhawk Network Holdings, Inc. HAWK and Consumer Portfolio Services, Inc. CPSS. While Euronet Worldwide sports a Zacks Rank #1 (Strong Buy), both Blackhawk and Consumer Portfolio Services carry a Zacks Rank #2 (Buy).

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