The year 2013 has been a pivotal economic period marked with bullishness, with investors gaining confidence in stocks and the market as a whole. A critical pillar in this historic rally has been the recovery of the financial sector, more specifically through the rise of regional banks. Despite this sector's popularity and outperformance, there are still opportunities for buyers to find value and continue to make money in this industry. One such opportunity lies in a regional bank by the name of SunTrust (STI). SunTrust Bank has performed exceptionally well since the depths of the financial crisis, and is better prepared to tackle the interest rate environment going forward. Wall Street, however, hasn't been rewarding SunTrust with the popularity, and price, that it deserves. Investors shouldn't wait to take advantage of this opportunity to own a high quality bank at a substantial discount to its intrinsic value.
SunTrust Banks, Inc. is a regional financial service company with over $171 billion in assets and operations primarily in the southeast. The company provides deposit, credit and investment services to a wide portfolio of clients in both the retail and institutional market. With a market cap of close to $18 billion, SunTrust is a relatively large player in the regional financial sector. This allows the company to expand services and offer higher quality products as the economy improves and business confidence recovers.
SunTrust's management is led by financial veteran William Rogers Jr., who has been with the company since its merger with Trust Company of Georgia in 1985. After the merger, Rogers served as Corporate Executive Vice President and later Chief Operating Officer. In 2008, at the height of the recession, Rogers became president of the company, and assumed the title of CEO in 2011. This extensive experience with SunTrust gives Rogers a unique understanding of the company's roots and overall strategy as a bank. Apart from his work at SunTrust, Rogers was also appointed as a director of the Federal Reserve Bank of Atlanta in early 2012. Rogers' knowledge of the macroeconomy and the business environment complements his role as CEO in a way that should give SunTrust an advantage. Investors should feel comfortable with Rogers at the helm of the company due to his well known expertise and his years in top leadership positions within the organization. What's more, Rogers has over $4.5 million invested in SunTrust's future success through options and stock. This means that his interests in the results of the company are the same as shareholders - if STI's price increases, so does his compensation. This alignment with stockholders should add to Rogers' motivation to bring out value, and means a greater push for success over the long term.
STI's financial strength has allowed it to be flexible in its rewards to shareholders. Before the financial crisis SunTrust paid out $.77 per share in dividends, but due to the economic downturn, had to slash its payout to stay competitive. If the dividend cuts of 2008-09 are taken out, however, SunTrust has never cut its payout and has consistently raised it since 1985. This commitment to shareholder distribution is met with SunTrust's superior cash position which allows the company to increase payouts in the future. STI currently pays a quarterly dividend of $.10 per share, which gives the stock a yield of 1.18%. While this payout isn't anything to get excited about in the short term, what investors should notice is the company's use of cash to pay its dividend. SunTrust's payout ratio, or the percentage of earnings used for dividend distribution, is 10%. This means that SunTrust could increase its dividend to pre-crisis levels and still have earnings to run its business. While a quick increase of that size is highly unlikely, this payout ratio means that SunTrust will have no trouble raising its dividend for many years to come, whether it increases earnings or not.
Despite SunTrust's numerous strategic and financial advantages, the company hasn't garnered the attention and valuation that other banks receive. When looking at STI's metrics, it becomes apparent that Wall Street is overlooking this well-run enterprise with respect to its competitors. The first signal comes from SunTrust's multiple. STI trades at a P/E of 8.4, which compares favorably with the industry average of around 10. A 19% discount to the average indicates that either investors are pricing in a grim future or are overlooking the strong fundamentals of the company. Another metric that indicates a mismatch between SunTrust's price and real value lies in its price relative to its book value. SunTrust's current book value comes in at $37.73 per share, which is 16.3% higher than where it trades today. This means that if SunTrust were to liquidate all its assets and give the proceeds to shareholders, it would be worth more than what the company is currently being valued at. When a company trades below its book value, it usually means past performance doesn't deserve a rich valuation. This, however, is not the case with SunTrust, which has been growing earnings and revenue at a fast pace since the recession. In 2011, STI earned $.932 per share in earnings. The very next year, in 2012, it earned $3.072 in EPS. This represents a 230% gain year over year, a phenomenal result by any standard. So far in 2013 the company has earned $1.96 in earnings, 80% better than the $1.09 it earned in the same period last year. These growth figures aren't those of a struggling bank but of an expanding business that deserves to trade at its book value or better. If the company continues its commitment to shareholder distribution and keeps its balance sheet strong, these results will continue to outperform. SunTrust has the customer base and the experience to keep growing its top and bottom line at a strong pace going forward.
In SunTrust's most recent quarter, management outlined many opportunities for the company to expand in the future as well as ways it is capitalizing on current developments. Its first approach to the current rate environment is to take full advantage of the steepening yield curve. On the conference call SunTrust held on July 19, management said that the higher yields on loans would "aid net interest income in the near term to the tune of $8 million per quarter." This addition to the balance sheet shows that SunTrust's business model will profit from the rise in interest rates in potentially a big way.
Another way SunTrust benefits from the economic recovery is through the retail investment segment. As more individuals gain confidence in the stock market and the economic recovery, they will want to be more flexible with their assets and consider stocks as an option. These individuals will go to SunTrust for brokerage and other services to help them grow their nest egg. SunTrust will take advantage of the higher fees associated with this gradual rotation into stocks, which will transfer to t hebottom line and earnings.
Analysts are slowly starting to see the superior position SunTrust is in and are updating their outlooks as a result. On September 6th, Deutsche Bank upgraded STI to a Buy from a Hold and raised its price target from $36 to $39. Less than a week later, Compass Point did the same thing, upgrading SunTrust to a Buy with a price target of $38. A price target of $38 represents a 17% gain from current levels, and would be near the company's book value. These two upgrades in quick succession mean that institutions are picking up on SunTrust's fundamentals and could be a signal that the rest of the Street is about to turn their attention to this sector and bank. Investors can buy into STI and look for other upgrades from analysts to send the stock higher.
With the economy and job market improving in the United States, many banks are considering increasing their loan activity to take advantage of rising interest rates. SunTrust can rely on its high quality assets and its experienced leadership to benefit greatly from this new development. What's more, institutions are starting to notice this overlooked bank and are upgrading their projections accordingly. Investors looking for a best of breed financial with a strong track record and a commitment to shareholders can feel confident in SunTrust's ability to unlock value and gain market share in a competitive business environment.