Even though regional banks SunTrust (STI) and BB&T (BBT) are both rated a "hold" on the Street, I still find attractive upside in both firms. The firms are well positioned to be top gainers from a macro recovery. From expense reductions to accretive takeover activity, the fundamentals have not been fully appreciated by the market due to investor fear despite double-digit gains for the year to date.
From a multiples perspective, SunTrust is the cheaper of the two. It trades at a respective 20.4x and 8.3x past and forward earnings with a dividend yield of 0.9%. BB&T, on the other hand, trades at a respective 16x and 10.3x past and forward earnings with a dividend yield of 2.2%. Wells Fargo (WFC) -- the regional bank that Wall Street prefers with with its "buy" rating -- is the cheapest at a respective 10.7x and 8.4x past and forward earnings. But from a regulatory standpoint, SunTrust and BB&T have fewer headwinds due to their sizes.
At the fourth quarter earnings call, SunTrust's CEO, Bill Rogers, noted:
Net income was $152 million for the quarter or $0.28 a share. Full year EPS was $1.09 and up meaningfully from the prior year. While we generated good core business momentum, and that was building throughout the year, some of that progress is being masked by legacy mortgage issues that continue to impact results.
Our favorable loan and deposit, both growth and mix trends, continued this quarter. Performing loans were up a solid 4%, and that is net of our continued efforts to reduce our exposure to higher-risk loans.
Other major highlights included a reduction in expenses, solid loan growth and improvement to credit quality. At the same time, the firm had greater reps and warranties (R&P), as demand has risen from Fannie Mae. While this, in and of itself, is not a positive, it creates greater uncertainty that obfuscates the strong fundamentals behind the bank, and thus will help generate high risk-adjusted returns.
Consensus estimates for SunTrust's EPS forecast that it will grow by 61.5% to $1.76 in 2012 and then by 51.1% to 11.3% in the following two years. Of the 26 revisions to estimates, 21 have come down for a net change of -4.8%. Assuming a multiple of 12x and a conservative 2013 EPS of $2.57, the rough intrinsic value of the stock is $30.84, implying 40% upside.
BB&T recently announced the purchase of Crump Group's life and P&C insurance businesses for $570M in cash. This will not only help diversify the business and bring the number of BB&T's insurance subsidiaries to 8, but will also be almost immediately accretive by 2% annually. This helps add momentum off of the strong fourth quarter earnings results, which beat consensus by 3.8%. The firm's community bank motif as a regional bank is attractive in terms of penetrating share during a recovery.
Consensus estimates for BB&T's EPS forecast that it will grow by 36.1% to $2.49 in 2012 and then by 14.5% and 10.5% in the following two years. Modeling a CAGR of 19.8% for EPS over the next three years and then discounting backwards by a WACC of 9%, yields a fair value figure of $39.57, implying 34.9% upside.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in (STI) over the next 72 hours.
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