CIT Viewed Cautiously After Earnings

February 2, 2016 by Jon C. Ogg

CIT Group Inc. (NYSE: CIT) has recently come under activist pressure to exit certain lines of business. Now its shares were heading south after missing earnings expectations with restructuring costs.

CIT’s core earnings sounded pretty good at $0.84 per share, versus a consensus estimate of $0.74 in earnings per share (EPS). Its GAAP EPS from continuing operations were $0.75, excluding significant items of $0.09 per share (-$0.16 for restructuring and $0.07 via a tax benefit).

24/7 Wall St. looked for analyst commentary on CIT after the report, and the first report is just not that favorable. Bill Carcache, of Nomura Securities has a Neutral rating. What is interesting is that the price target of $46.00 doesn’t sound very “neutral” against a $29.86 close and an even lower post-earnings reaction.

Net revenues came in lower than expected at $559 million, versus a $601 million consensus. Nomura said that this shortfall was driven by a lower net finance margin and slower-than-expected financing and leasing asset growth. The net finance margin came in at 3.57%, versus a consensus estimate of about 4.3% and the Nomura target of 3.73%, due to yield pressure from lower rail utilization and higher operating lease and maintenance costs.

Other data seen in CIT’s analyst report from Nomura were seen as follows:

  • The loss provision expense of $58 million was above the consensus of about $39 million.
  • One benefit here is that CIT’s core operating expenses were lower than expected, at least outside of a $53 million in restructuring charges.
  • Operating expenses came in at $305 million.
  • New business origination volumes were $4.2 billion, versus $3.3 billion in the prior quarter and $2.9 billion in the fourth quarter of 2014.
  • Deposits rose by 1.4% sequentially to $32.8 billion, now representing roughly 64% of CIT’s funding mix.

Carcache’s report said:

We expect CIT shares to remain under pressure on the back of today’s results. While shares currently trade at a discount to tangible book value, returns on tangible common equity of ~6% shine a spotlight on CIT’s inability to cover its cost of capital. Greater-than-anticipated margin compression and top line weakness will likely continue to fuel questions around the viability of CIT’s business model.

CIT shares were last seen on Tuesday down 7% at $27.76, and they did hit a new 52-week low of $27.65. CIT’s 52-week high is $49.27.

One last thing that investors should consider here is that the consensus analyst target prior to earnings was up at $50.67. That analyst target just seems rather high considering the drop off seen. CIT shares were trading at $39.70 on December 31.