February 24, 2015 CIT Group Inc. (CIT-NYSE) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 02/18/2015 Current Price (02/23/15) $46.13 Target Price $48.50 52-Week High $49.89 52-Week Low $41.52 One-Year Return (%) -2.09 Beta 1.45 Average Daily Volume (sh) 1,770,449 Shares Outstanding (mil) 183 Market Capitalization ($mil) $8,442 Short Interest Ratio (days) 4.69 Institutional Ownership (%) 99 Insider Ownership (%) 1 Annual Cash Dividend $0.60 Dividend Yield (%) 1.30 5-Yr. Historical Growth Rates Sales (%) -10.4 Earnings Per Share (%) 31.6 Dividend (%) N/A using TTM EPS 12.8 using 2015 Estimate 13.3 using 2016 Estimate 10.5 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page SUMMARY CIT Group s adjusted fourth quarter 2014 earnings from continuing operations surpassed the Zacks Consensus Estimate. Results were driven by a rise in rental income on operating lease and lower operating expenses, which were, however, partially offset by a fall in net interest and other income. We expect continued balance sheet restructuring initiatives and access to low-cost debt to drive growth going forward. Given the company s strong balance sheet position, capital deployment activities and inorganic growth initiatives should remain impressive. However, sluggish growth in the industries where CIT Group provides finance, together with stringent regulations, will likely dent the company s financial performance in the near term. Risk Level * Below Avg., Type of Stock Large-Value Industry Fin-Misc Svcs Zacks Industry Rank * 74 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 436 A 461 A 462 A 465 A 1,824 A 2014 398 A 455 A 389 A 489 A 1,731 A 2015 469 E 475 E 482 E 494 E 1,920 E 2016 2,050 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.81 A $0.87 A $0.96 A $0.65 A $3.29 A 2014 $0.55 A $1.02 A $0.89 A $1.13 A $3.59 A 2015 $0.80 E $0.83 E $0.96 E $0.87 E $3.46 E 2016 $4.41 E Projected EPS Growth - Next 5 Years % 10 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Founded in 1908 and incorporated as a Delaware Corporation, CIT Group Inc. offers commercial financing and leasing products and other services to small and middle-market businesses. The company provides its products and services across a wide spectrum of industries, mainly in transportation, aerospace and rail, and manufacturing and retail. In Dec 2008, CIT Group became a bank holding company (BHC), and in Jul 2013, it became a financial holding company. The company is regulated by the board of governors of the Federal Reserve System (FRS) and the Federal Reserve Bank of New York (FRBNY) under the U.S. Bank Holding Company Act of 1956. CIT Bank is a wholly owned subsidiary of CIT Group. In Nov 2009, CIT Group filed pre-packaged voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. Notably, the company emerged from bankruptcy in Dec 2009. Since its emergence from bankruptcy, CIT Group has been striving to gain a foothold in the market through its businesses. The company operates its business through following segments: The Transportation & International Finance segment includes CIT Group s commercial aircraft, business aircraft, rail and maritime finance business units. Additionally, the segment constitutes corporate lending businesses and Vendor Finance businesses outside North America. The North American Commercial Finance segment comprises CIT Group s earlier Trade Finance segment (which offered receivable management products, factoring and secured financing to businesses that operate in several industries, including apparel, textile, furniture, home furnishings and consumer electronics), transportation lending business, along with North American business units formerly under Corporate Finance and Vendor Finance segments. The Non-Strategic Portfolios segment consists of CIT Group s run-off government-guaranteed student loan portfolio, small business lending portfolio and other portfolios in Europe and South America. In Jan 2014, CIT Group acquired Nacco SAS a premier full-service wagon leasing company headquartered in Paris. Nacco owns around 9,500 wagons and offers its services to about 150 customers in 16 countries. Equity Research CIT Page 2
In Apr 2014, CIT Group completed the sale of its student loan business along with certain secured debt and servicing rights. In Aug 2014, CIT Group, through its banking subsidiary, CIT Bank, completed the acquisition of Capital Direct Group Inc., a provider of financing to small and mid-sized businesses. As of Dec 31, 2014, CIT Group had total assets of $47.8 billion, total deposits of $15.8 billion and net loans of $19.1 billion. The company had approximately 3,360 employees as of that date. REASONS TO BUY We expect an improvement in the global economy as well as domestic market to increase the demand for financing of inventories and capital equipment, thereby enabling CIT Group to witness AEA growth. The company expects AEA to grow in the range of 5 10% in the near term. Also, in order to achieve a pre-tax return on AEA in the range of 2.0 2.5%, the company plans to lower operating expenses. CIT Group has been aggressively restructuring its liability profile through repayment and refinancing of high-cost debt. Further, as of Dec 31, 2014, the weighted average coupon rates of outstanding deposits and long-term borrowings declined to 3.11% from 3.33% as of Dec 31, 2013. Apart from lowering the funding cost, the initiative continues to aid net finance margin growth, which the company projects in the range of 3.75 4.25% in the near term. We believe the initiative will enable the company to provide more flexible financing to small and mid-sized organizations. With a changing operating environment, CIT Group has been restructuring its business operations. Apart from re-organizing its segments, the company is making progress toward lowering the Non-Strategic Portfolios. Notably, it has exited all the less profitable countries in Asia, and a number of countries in Latin America and Europe. Now the company aims to exit from the remaining countries in Europe and Latin America as well. These initiatives, upon completion, are expected to reduce operating expenses by roughly $60 million on an annual basis. After emerging from bankruptcy in 2009, CIT Group has come a long way. The company is now steady enough to expand inorganically as well. In Jul 2014, the company announced the OneWest acquisition deal worth $3.4 billion. Following the completion of the transaction, CIT Group will become a $50 billion-plus company. Further, in Aug 2014, the company completed the acquisition of Capital Direct Group. Given the strong liquidity position and stabilizing balance sheet, we expect CIT Group to continue expanding through acquisitions. Also, CIT Group is an asset for yield-seeking investors. In Jul 2014, the company announced a 50% hike in its quarterly dividend to $0.15 per share, after resuming dividend payment in Oct 2013 following the termination of its agreement with the FRBNY which restrained the company from deploying capital without prior approval. Moreover, the company has an active share buyback plan in place. As of Jan 23, 2015, the company had share repurchase authorization worth nearly $146 million, due for expiry on Jun 30. We believe that given its strong capital position, the company will continue enhancing shareholders value. Equity Research CIT Page 3
REASONS TO SELL CIT Group provides about 70% of its total lending to commercial airlines, manufacturing, retail, transportation and service industries. Sluggish growth or any other contingencies in any of these sectors could hamper the company s prospects as the borrowers may not be able to make timely payments of loans and interest. The changes within the financial services industry and regulatory actions such as the Dodd-Frank Act are expected to have a long-standing impact, resulting in higher costs, fee reduction and restrictions. Though the full impact of these changes is still uncertain, we anticipate that it will likely weigh on the company s revenue growth and expense-control initiatives. Further, in the medium term, stricter capital requirements are expected to partly lower CIT Group s flexibility with respect to business investments. Although the company has a strong liquidity position and is expected to meet the requirements, it may require additional liquidity management initiatives, including addition of more liquid assets, issuing term debt and modifying product pricing for loans, commitments and deposits. RECENT NEWS CIT Group Beats Q4 Earnings on Higher Lease Revenues Jan 27, 2015 Improved operating lease revenues aided CIT Group s fourth-quarter 2014 adjusted earnings from continuing operations of $1.13 per share, which surpassed the Zacks Consensus Estimate by 20.2%. Also, this came above the year-ago figure of $0.61. Better-than-expected results benefited from an increase in rental income on operating lease and lower operating expenses, which were, however, partially offset by lower net interest and other income. Notably, credit quality was mixed, while liquidity position remained strong. After considering certain non-recurring items, net income came in at $251 million or $1.37 per share. This was up from $130 million or $0.65 per share reported in the prior-year quarter. Similarly, net income in 2014 totaled $1.13 billion or $5.96 per share, up from the prior-year figure of $676 million or $3.35 per share. Performance in Detail On a non-gaap basis, total net revenue was $489.3 million, up 8.1% from the year-ago quarter. The rise was largely attributable to an increase in net finance revenue, partly offset by a dip in other income. Further, the figure outpaced the Zacks Consensus Estimate of $448.0 million. In 2014, total net revenue (non-gaap) was $1.73 billion, down 2.4% year over year. However, the figure beat the Zacks Consensus Estimate of $1.69 billion. Net interest revenue was $29.3 million, down 26.2% from the year-ago quarter, mainly due to higher interest expenses. Total non-interest income was $662.9 million, up 12.1% year over year. The increase was driven by higher rental income on operating leases, partially offset by a fall in other income. Equity Research CIT Page 4
Net finance margin (excluding the impact of debt prepayment) grew 5 basis points to 4.34%. The improvement reflects strong equipment utilization, higher level of interest recoveries and the benefit of suspended depreciation on operating lease equipment held for sale. These were, nevertheless, partially offset by portfolio re-pricing. Operating expenses (excluding restructuring costs) were $242.1 million, down 9% from the prior-year quarter. The decrease was due to the absence of expenses related to a $45 million tax settlement incurred in the prior-year quarter. Credit Quality CIT Group's credit quality was a mixed bag during the reported quarter. Non-accrual loans fell 33.3% year over year to $160.5 million. However, net charge-offs were $23.1 million, up 54% from the prior-year quarter. Also, provision for credit losses was $38.2 million, up 4.2% from the year-ago quarter. Balance Sheet and Capital Ratios As of Dec 31, 2014, cash and short-term investment securities amounted to $8.9 billion, comprising $7.1 billion of cash, $0.7 billion of reverse repo securities and $1.1 billion of short-term investments. Also, CIT Group had approximately $1.4 billion of unused and committed liquidity under a $1.5 billion revolving credit facility, as of the same date. As of Dec 31, 2014, Tier 1 capital ratio of 14.5% and total capital ratio of 15.2% declined from the respective prior-year quarter levels. Book value per share was $50.13 as of Dec 31, 2014, up from $44.78 as of Dec 31, 2013. Share Repurchase During the quarter, CIT Group bought back 2.5 million shares for $117 million. CIT Group s Merger Deal with OneWest Bank Jul 22, 2014 CIT Group announced a definitive agreement to merge with IMB Holdco LLC, the parent company of OneWest Bank N.A. The cash cum stock deal is valued at $3.4 billion. Per the agreement, shareholders of IMB Holdco LLC will receive $2.0 billion in cash and 31.3 million shares of CIT Group presently valued at $1.4 billion (assuming a CIT stock price of $44.33 per share). Notably, the deal, subject to regulatory approvals and customary closing conditions, is expected to close by the first or the second quarter of 2015. OneWest Bank is a privately owned regional bank operating 73 retail branches in Southern California. Following the completion of the deal, CIT Group will assume approximately $23 billion in assets and $15 billion in deposits. Further, CIT Bank, the company s banking subsidiary, will merge with OneWest Bank under the name of CIT Bank. Moreover, the company expects the transaction to be 20% accretive to earnings per share in 2016. Further, overall cost of funding is expected to decline by nearly 100 basis points. Equity Research CIT Page 5
Dividend Update On Jan 21, CIT Group announced a quarterly dividend of $0.15 per share. The dividend will be paid on Feb 27 to shareholders of record as on Feb 13. VALUATION CIT Group currently trades at 13.3x the Zacks Consensus Estimate for 2015, which is 15% below the 15.7x for the industry average. On a price-to-book basis, the shares trade at 0.9x, a 81% discount to the industry average of 4.8x. Hence, the valuation looks attractive on both price-to-book and price-toearnings basis. Moreover, CIT Group has a trailing 12-month ROE of 7.7% compared to negative industry average. This implies that the company reinvests its earnings more efficiently than its industry peers. Our six-month target price of $48.50 per share equates to about 14.0x the Zacks Consensus Estimate for 2015. Combined with a quarterly cash dividend of $0.15 per share, this price target implies an expected total return of 5.8% over that period, which is consistent with our long-term Neutral recommendation on the shares. However, CIT Group carries a Zacks Rank #4 (Sell). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low CIT Group Inc. (CIT) 13.3 10.3 10.0 6.7 12.8 62.6 12.2 Industry Average 15.7 15.4 14.7 15.1 48.3 147.7 11.4 S&P 500 16.8 15.7 10.7 15.3 19.4 19.4 12.0 Harbinger Group Inc. (HRG) N/A N/A N/A 6.1 N/A 92.3 11.4 Daiwa Securities Group Inc. (DSEEY) N/A N/A N/A 7.1 9.5 35.0 7.4 Moody's Corp. (MCO) 21.2 18.7 13.0 20.3 23.1 25.6 11.0 Cielo SA (CIOXY) 16.4 14.6 N/A 16.5 15.4 24.5 13.4 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA CIT Group Inc. (CIT) 0.9 1.9 0.7 7.7 2.1 1.4 8.4 Industry Average 4.8 4.8 4.8-9.4 2.6 104.6 8.0 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research CIT Page 6
Earnings Surprise and Estimate Revision History Equity Research CIT Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CIT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform - 15.7%, Neutral - 75.5%, Underperform 8.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Copy Editor Content Ed. 11A Kalyan Nandy Swayta D. Shah N/A N/A Equity Research CIT Page 8