Is It Time to Buy SunTrust?
Paula is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
SunTrust Banks (NYSE: STI), a regional bank with a strong presence in the Southeastern U.S., just announced its quarterly earnings, and the news was sweeter than southern sweet tea. It’s first quarter 2012 net income stood at $245 million, a massive leap above its same-quarter income of $180 million in 2011.
This comes as great news for SunTrust, which has been struggling since the southeastern U.S. got hit particularly hard by the recession. The rate of foreclosures in Georgia and Florida is among the highest in the nation, and SunTrust got smacked with a massive load of loan defaults.
The recovery has been slow, both for SunTrust in particular and in the southeast in general. The number of Americans moving to Atlanta fell by 83 percent between 2006 and 2009, according to the New York Times.
In addition to coping with a stagnant regional economy and a massive heap of mortgage defaults, SunTrust has also needed to fend off encroaching competition. The nation paid close attention when Wells Fargo (NYSE: WFC), which emerged relatively unscathed from the recession, purchased Wachovia, the dominant regional banking leader in the southeast. Well Fargo is a much bigger, stronger fish in the sea (Warren Buffet famously bought a large stake in Wells Fargo two years ago), and its acquisition of Wachovia gives the bank huge southeastern market share. It seems there is a Wells Fargo branch on every street corner in the region.
However, another important competitor has entered the southeast, although this competitor hasn’t derived as much national attention. Fifth Third Bancorp (NASDAQ: FITB) is aggressively expanding into the southeastern region. Fifth Third is a Midwestern regional bank with such a strong reputation that many Midwesterners refer to ATM’s as “Jeannie’s,” in honor of Fifth Third’s cartoon icon Jeannie. The bank’s decision to move southward may be spurred by the “Great Southern Migration,” the modern incidence of Midwesterners, particularly from job-starved states like Michigan and Ohio, flocking to the South in search of jobs and better weather. Fifth Third’s familiarity among these Midwestern migrants gives it an automatic edge.
In short: SunTrust is facing encroaching competition at the exact moment when its region is experiencing a massive economic crisis and its balance sheets are marred by loan defaults. And yet this latest quarterly report indicates that SunTrust is emerging from this tough time admirably, with growing income and an improving balance sheet.
SunTrust Emerges Strong
The free market isn’t the only arena in which SunTrust is succeeding; the company is also benefiting by being on the receiving end of taxpayer subsidies. (And no, I’m not talking about tax bailouts).
The U.S. Treasury announced earlier this year that SunTrust will receive $45 million in tax credits through the federal New Markets Tax Credit program, a program created by Congress in 2000 to encourage banking and real estate investing in low-income areas.
Speaking of bailouts, SunTrust paid back $4.9 billion in TARP money last year. Now that Uncle Sam has been reimbursed, the SunTrust board can turn its attention back to shareholders: today it announced that its offering a dividend of 5 cents per share of common stock.
Should You Buy It?
At the end of 2011, SunTrust had a book value (excluding goodwill and other intangibles) of $25.33. As of the time of this writing, SunTrust is currently trading at a 10 percent discount from that value.
SunTrust currently offers EPS of $1.46. Analysts expect SunTrust to earn EPS at $1.84 this year, and that projection was made before today’s great news about the higher-than-expected first-quarter net income. The Board’s decision to start issuing a dividend is further icing on the cake.
That said, there’s still uncertainty for banking and for the southeast in general. RealtyTrac estimates that the southeastern U.S. holds a foreclosure housing glut that’s backlogged by one year, and several counties across Florida and Georgia report some of the highest foreclosure rates in the U.S. As long as this foreclosure glut weakens the southeast, banking in that region will continue to see slow growth.
Furthermore, inflation (in a few years) is the elephant in the room. SunTrust makes a lot of its money from the spread between the rate at which it borrows and the rate at which it lends. If the Fed aggressively tries to combat inflation by raising the interest rate, all banks could suffer. And a bank like SunTrust, which is a small fish in a weak region, would once again be put to the test.
The bottom line? I’ll keep an eye on SunTrust as a long-term play. If SunTrust stock becomes a little cheaper, I’ll consider buying it.
PaulaPant has shares of Wells Fargo. The Motley Fool 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.