So has the time come for the canny 500,000 who held on to their windfall shares to take their money and run? Northern Rock's shares, buoyed up by recent takeover speculation, are now trading at a chunky premium to the sector and a recent spate of profit-taking, has seen the shares come off their high of 625p.
On the other hand, there is no denying the underlying strength of Northern Rock's business. Like almost every other bank, Northern Rock aims to boost profits by cost cutting. It is trying to persuade more and more customers to use cheap-to-run telephone banking rather than its expensive branch network. But unlike almost every other bank, Northern Rock does not want to boost profits by across the board volume growth. Rather, it aims to grow revenue by targeting selected groups of customers. For example, its policy of focusing on "quality" debt has led to a substantial fall in arrears, as the chart opposite shows.
This dual strategy of cost-cutting and selective revenue growth has paid off so far. Pre-tax profits for the year to December grew by 18 per cent to pounds 197.7m, before exceptional items. And analysts are forecasting double- digit profit for at least the next few years.
Still, on their own these solid business prospects are insufficient to justify Northern Rock's current valuation. There are, though, two good reasons to believe there may be life in Northern Rock's shares yet.
First, there are the persistent takeover rumours, which are unlikely to disappear in a sector which is in the midst of restructuring and rationalisation. Second, there is the prospect of entry into the FTSE 100. Northern Rock currently ranks around 92nd in terms of market capitalisation. If, come March, it is admitted into the FTSE 100 club, expect an initial surge in the share price as large institutions start to buy into the company.
Forecasts from Wise Speke put Northern Rock on a forward p/e of a pricey18.5. The shares are worth hanging on to for now, but there looks better value elsewhere in the sector for the long-term investor.