Fifth Third Bancorp (NASDAQ: FITB) is seeing a floodgate opened with sellers thrashing shares.  The culprit for this is a downgrade out of BMO Capital, where the brokerage firm downgraded the stock to a Market Perform rating.

The brokerage firm believes that Fifth Third is going to have to pursue a capital raise and believes a 50% haircut to its dividend may be coming sooner rather than later.  because of charge-offs and marked assets, the firm also slashed its earnings projections for the banking firm.  It lowered its fiscal 2008 projections from $1.93 down to $1.62 and lowered its 2009 projections down from $2.27 EPS down to $1.95. 

First call has estimates of $1.87 EPS for 2008 and $2.20 for 2009.  The lowest estimate we have seen in this for 2008 is $1.00 and for 2009 the lowest estimate is $1.65.

Unfortunately for Fifth Third, BMO noted that it will also trade at a discount to its book value on its capital ratios being under levels that they should.

The question to ask is if you can stomach the value versus a potential value trap.  Shares are down 14% at $12.58 today.  This isn’t just a 52-week low, it is a low which hasn’t been seen since the mid-1990’s.  If we took the new BMO EPS targets and then took the lowest EPS targets from Wall Street for forward estimates we get the following for future P/E ratios based upon a $12.50 level:

• BMO forward P/E is 7.7 for 2008 and 6.4 for 2009;
• Lowest estimates forward P/E is 12.5 for 2008 and about 7.5 for 2009.

On the surface it sounds cheap, and the market cap has slid down to $6.6 Billion now.  The 52-week high is $43.20.  The problem is that if the company has to go in and raise cash to shore up capital, which it has said it didn’t need to raise in the near-term before, then all bets are off because you have no way to know at what price they have to give they keys to the castle away.

We have reviewed Fifth Third and some of the other super-regionals or smaller money center banks for possible additions to likely takeover targets for our SPECIAL SITUATION investing newsletter in recent weeks and recent months, but unfortunately the problems here are just too deep and catching the knives can just come with too large of a price tag.

Jon C. Ogg
June 13, 2008

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