BB&T – The Rodney Dangerfield of Banks
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes no matter what a company does, it just can't get any respect. In a recent article by fellow fool Sean Williams, he pointed out that BB&T (NYSE: BBT) stock looked to be richly valued. Short-sellers have been increasing their positions as of late and the thought was if BB&T didn't end up merging with BankAtlantic Bancorp, that investors could be in for some losses. He did give credit to BB&T for surviving “the credit crisis in better shape than most banks”. However, he pointed out that BB&T's growth seemed to have, “stalled out even three years after the height of the crisis.” While I agree the BankAtlantic deal has some challenges, I want to examine his claims that BB&T's growth had stalled out recently.
Unless you live on the eastern seaboard, you might not even know who BB&T is. BB&T is currently one of the largest financial services holding companies in the U.S. with about 1,800 branches. “BB&T is consistently recognized for outstanding client satisfaction by J.D. Power & Associates, the U.S. Small Business Administration, Greenwich Associates and others.” (BB&T News Release - BB&T Increases Dividend 25%, March, 13, 2012) In truth, BB&T is one of the largest banks in the country, and most people in the western half of the country have no idea this bank exists.
When it comes to growth, prior to the Great Recession, the company had paid and increased its dividend for over 30 years. As with most banks, once earnings declined below the dividend, something had to give. BB&T recently was one of the banks that passed the government's stress test, and in turn raised their dividend by 25%. Here are the numbers and where the stock stands today:
Current Price: $31.50
P/E on '12 earnings: 12.55
Growth expected: 9.59%
Just for point of comparison, SunTrust Banks (NYSE: STI) has a forward PEG ratio of 1.34, and pays a dividend of 0.81%. Regions Financial (NYSE: RF) is another direct competitor of BB&T's. Region's forward PEG is 2.81 and they pay a dividend of 0.62%. Lest anyone think I'm cherry picking my examples, let's also look at PNC Financial Services (NYSE: PNC). PNC is a strong rival of BB&T's, and they have a forward PEG of 1.54 with a yield of 2.19%. So at least according to analysts expectations of growth, BB&T is actually the cheapest on a relative basis, and the shares have the best yield. I don't see a lot about this comparison that says BB&T shares are “richly valued”.
I would also look at BB&T's balance sheet as further proof that the company has not “stalled-out” when it comes to growth. Let's look at 3 of the most important categories on any bank's balance sheet: cash, loans, and deposits. We'll compare BB&T to some of its peers, to see how the company is doing versus its competition.
(all percentages - last 4 quarters)
So not only has BB&T's growth not stalled, they have been handily outperforming 3 of their competitors in the last year. If the average forward PEG of SunTrust, Regions, and PNC is about 1.90, you could make the case easily that BB&T should carry this PEG. With a PEG of 1.90, BB&T stock would sell for $45+. Even if we remove Regions from the equation, as they have clearly been underperforming, BB&T is growing much faster than either SunTrust or PNC. The average forward PEG of these two banks is 1.44. BB&T clearly is doing better than either company and should sell for a higher multiple. Even at 1.50 for a forward PEG, BB&T stock should sell for at least $36. When you add the fact, that BB&T also pays a higher dividend than any of the three we've looked at, I don't have any trouble assuming BB&T stock might fetch $40 a share.
If BB&T's merger with BankAtlantic does go through, it adds additional earnings growth. The fact that short-sellers have added to their positions in BB&T in the last month or so, is likely an arbitrage play. The problem is, those short-sellers are assuming BB&T's stock is in trouble without the BankAtlantic deal. Based on the numbers, BB&T would do just fine on its own. I was very short sighted (pun intended) and closed out my outperform rating on BB&T on CAPSCall in the past. I won't make the same mistake this time. I'm re-instituting my outperform call on BB&T today. Use this post as a starting point for your research, and see if this 140 year old institution should get more respect after all.
The Motley Fool owns shares of PNC Financial Services. MHenage has no positions in the stocks mentioned above. 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.