Is SunTrust A Good Stock to Buy?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Companies in the banking industry are currently trading at fairly low multiples of historical earnings, and in some cases at less than the book value of their equity. As such, they can be a good place to start looking for value stocks. One such under-valued bank is SunTrust (NYSE: STI).
The bank got good income growth in the second quarter of 2012 compared to the second quarter of 2011, though it came almost entirely from exploiting a widening in interest rate spreads. Interest income actually fell 3%, led by a decline in interest on loans; however, the bank was able to cut interest paid on deposits and so net interest income edged up. In addition, SunTrust cut its provisions for credit losses; this factor alone accounted for most of the company’s increase in earnings before taxes. The bottom line came in at $0.51 per share versus$0.33 per share in the same quarter last year- a large increase, but we don’t think that the bank can get further growth from these areas. However, the decrease in credit loss provisions may be appropriate, considering that compared to the beginning of this year SunTrust has a larger share of its consumer and home loan assets associated with borrowers with credit scores over 700- but we doubt this is sustainable.
The market has rewarded SunTrust's recent performance. The stock is up 55% since a year ago, and the sell-side believes that the bank actually can generate strong income growth. The trailing price-to-earnings ratio is 19, which is higher than at many larger banks, but the forward multiple based on consensus 2013 earnings is 10 and the five-year PEG ratio is 0.5. We also can look at the P/B multiple of 0.8, and see that there is a value case here that is not dependent on the sell-side’s estimates (though, again, some larger banks trade at even greater discounts to book value).
SunTrust’s notable competitors include Bank of America (NYSE: BAC), BB&T (NYSE: BBT), Wells Fargo (NYSE: WFC), and PNC Financial Services (NYSE: PNC). These banks are all larger than Suntrust, which has a market cap of $16 billion. Bank of America was one of the larger banks that that had lower multiples: it trades at 10 times earnings on both a trailing and forward basis, and at half the book value of its equity. Some of the negative consumer sentiment towards Bank of America- being bailed out during the financial crisis, having planned to raise debit card fees last fall- is still harming the company’s brand, and even with its aggressive job-cutting plan it may still have too many businesses under the same roof. Despite all this, we still think it may be a good value play.
PNC trades at about book value, while Wells and BB&T trade at premiums of about 30%. All three of these banks are also bunched between 12 and 14 times trailing earnings, a bit lower than Suntrust. BB&T and Wells also posted increases in earnings last quarter compared to a year ago. We see the current interest rate environment as remaining about the same for the near future, and so we’re not sure where further growth at SunTrust is supposed to come from. That being said, it seems priced about right compared to most of its peers. Bank of America may be a better value, but we acknowledge that investors may want to avoid a company undergoing such a transition.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool owns shares of Bank of America, PNC Financial Services, and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.