We are upgrading our recommendation on the shares of Financial Federal Corp. (FIF) to Neutral as we think that the shares of the company are currently trading at a price almost near the agreement value with People’s United.
On Nov 22, 2009, Financial Federal entered into a merger agreement with People’s United Financial Inc. The transaction is expected to close in the third quarter of fiscal 2010. Under the terms of the merger, Financial Federal shareholders will receive $11.27 in cash and one share of People’s United common stock.
Calculated with the closing price of People’s United shares on Nov 20, the transaction is valued at $27.74 per Financial Federal share. As a result, the shareholders of Financial Federal will receive a slight premium on the Nov 20 closing price. Also, the receipt of People’s United stock by shareholders of Financial Federal is expected to be tax-free.
Overall, after being acquired by People’s United, Financial Federal will overcome its difficulties and accumulate a larger market share. The combined portfolio will rank People’s United at thirteen among U.S. bank-owned equipment finance businesses.
Financial Federal’s first quarter fiscal 2010 (ended Oct 31) earnings of 35 cents per share were only a penny ahead the Zacks Consensus Estimate. However, the earnings for the quarter were down 26% from 47 cents per share in the prior-year quarter.
Though Financial Federal has benefited from lower funding costs and improved net interest margin, originations have continued to be weak, given the current state of the economy.
Results were also negatively impacted by a higher provision for credit losses and increased expenses. However, a significant improvement in net interest margin and strong liquidity were impressive during the quarter.
Also, on the positive side, Financial Federal is financially sound as it has strong liquidity and conservative financial leverage. As of Oct 31, 2009, total debt remained 2.0 times equity (down from 3.3 times as of Oct 31, 2008), which we continue to view as reasonable, given the types of equipment being financed. Also, a low leverage level will allow the company increase its assets substantially and continue equity distributions and repurchases.
Nevertheless, growth deserves a close watch for the time being, as we are concerned about the continuous weakness in originations. Though the credit quality has remained acceptable so far, we have been noticing significant signs of strain for the last several quarters.
On Tuesday, the shares of Financial Federal closed at $27.71 on the New York Stock Exchange, down slightly from the previous day’s closing price of $27.73.
Read the full analyst report on “FIF”
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