City National Corp.'s stock has been on a tear lately, setting numerous 52-week highs and proceeding to burst right through them again.
Since July 17, when the Beverly Hills-based banking company reported its financial results for the second quarter ended June 30, its stock has surged 12 percent, closing at $47.50 Aug. 9.
Not bad for a regional bank operating in a murky economic climate one that's all the more questionable here in California, where energy crises and technology-company implosions have kept away jittery investors.
So what gives?
Russell Goldsmith, City National's chief executive, will tell you that things were more unsettled six months ago, when City National stock was trading in the $35 range. "A lot of what was restraining our stock was what I call national and California concerns," Goldsmith said.
The most prominent was City National's large portfolio of syndicated loans. These loans are typically initiated by a larger bank and then put into a pool that is mutually owned by numerous institutions.
"A lot of these syndicated credit issues started going bad," said Jacqueline Reeves, an analyst with Putnam Lovell Securities Inc. in New York. With the exception of the lead bank, "there's no way for people in the syndicate to truly know ahead of time, enough to get out before trouble hits."
City National has been working to reduce the size of its syndicated loan portfolio for some time. During the second quarter, it reduced the portfolio by another $38 million, bringing it to $110 million, about 20 percent of its former size.
"We were able to bring the total down better than expected," Goldsmith said.
The California concerns are well documented: The energy crisis and its potential effect on the California economy, the technology blow-up, the possibility of strikes in the entertainment business, where City National is particularly active.
But City National had practically no exposure to technology, and possible writers' and actors' strikes didn't materialize. Meanwhile, the energy crisis fizzled.
When City National's stock broke through many price targets recently, some analysts, like Reeves, reset theirs higher. A few others downgraded the stock. As of late last week it was trading at about 16.5 times earnings, a bit below the 17.5 P/E ratio for the average member of the S & P; MidCap Bank Index of which City National is a component.
"Even if you don't give them a premium (price/earnings multiple)" to regional-bank peers, City National's stock price should reach the new target of $52 next year, based on earnings growth, said Reeves, whose former price target was $47.
She's expecting City National to earn $3.32 per share in 2002, up from $2.72 in the year ended Dec. 31, 2000 and an estimated $3.02 for the current year.
Others aren't so optimistic. Campbell Chaney, a Sutro & Co. analyst in San Francisco, downgraded City National to a "hold" after it broke through his price target of $40. Investors who listened to him haven't participated in the recent run-up.
"We've missed it. Hats off to the guys who didn't," Chaney said. While Chaney concedes City National has performed well given the economic climate, he believes City National's stock is in the throes of a run that's based more on technical data than fundamentals.
"The company came out and gave us very conservative (earnings) guidance at the beginning of the year, and they've been meeting that guidance," Chaney said. He believes that momentum investors got involved in City National once it broke through a price ceiling of $42. Those investors tend to rely more on computer-generated models than on intimate knowledge of a company's business, and once the stock stops increasing and the volume dries up, they sell out.
City National officials don't quibble with the idea that momentum investors might be jumping into their stock. They just don't believe it's the most important factor in the stock's rise.
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