Why Fifth Third Bancorp Is Heading To $25

Apr.16.14 | About: Fifth Third (FITB)

Summary

With share trading at a P/E of 10 and a dividend yield of 2.2%, it's hard to imagine a better bargain out there.

While Fifth Third has strong footprint that has grown from the Midwest, the bank still has plenty of room to grow in areas like North Carolina, Georgia and Florida.

With the stock trading at around $22 per share, I project these shares to reach $25 on the basis of long-term return on equity of 10.5%.

With better-than-expected results coming in from large money-center banks like Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM), investors in smaller regional banks like Fifth Third Bancorp (NASDAQ:FITB) have plenty about which to be excited. Despite recent concerns about a prolonged weak interest rate environment and margin compression, Fifth Third has always been a standout performer, especially in terms of loan growth.

What's more, very few banks can match Fifth Third is areas like organic growth. With management's plans to expand the bank's position within the southeast parts of the U.S., which are known for its high value, investors can expect sustained revenue and profit growth. Not to mention, share buybacks and higher dividends. As it stands, with the company due to reports first-quarter earnings Thursday, Fifth Thirds looks like a slam-dunk to perform both in revenue and profits.

The Street will be looking for 41 cents in earnings per share on revenue of $1.51 billion. Consensus estimates have decline by 1 cent over the past 90 days. But analysts seem generally optimistic, nonetheless. For the full fiscal year, analysts are projecting earnings of $1.80 per share.

In terms of revenue, analysts project $1.51 billion for the quarter, which would represent a year-over-year decline of more than 7%. Last year, Fifth Third posted revenues of $1.74 billion. For the full year, revenue is seen coming in at $6.24 billion. But as noted, given the weak interest rate environment, revenue growth alone is not the important metric in this sector.

As well as JPMorgan and Wells Fargo performed, they both posted year-over-year revenue declines. In the case of Fifth Third, it's worth noting that the bank has produced on average 4% year-over-year revenue growth in the past four quarters, including a 20% year-over-year jump in the second quarter. But that's not to suggest that investors should expect some sort of miracle on Thursday.

What impresses me the most is the manner in which the bank's management has been able to offset the revenue issues with strong profitability. Thursday, I expect management to continue that streak. I will also expect Fifth Third to show strong improvement in areas like low credit costs and fee income growth - all of which should help bolster the bank's bottom line.

Investors should also pay attention to what management says about the bank's assets - particularly, the direction management will take with those that are underperforming. As much as I like Fifth Third's business today, the extent to which management can deleverage the bank from weak interest rates will allow Fifth Third to do things like issue dividends and buyback stock in a much quicker fashion.

Strong capital returns remain a strong driver within this sector, especially from the standpoint of adding a boost to earnings per share. Likewise, I want to see improvement in areas like net interest margin (the metric that explains how well management has utilized capital relative to the bank's debt situation).

For now, I remain encouraged by the bank's strong year-over-year improvement. Equally impressive, the bank still has several growth opportunities. While Fifth Third has strong footprint that has grown from the Midwest, the bank still has plenty of room to grow in areas like North Carolina, Georgia and Florida.

Finally it comes down to value. With the stock trading at around $22 per share, I project these shares to reach $25 on the basis of long-term return on equity of 10.5%. Although there are many high-quality banks out there, Fifth Third is one of only a handful that has a business that is easy to understand. With share trading at a P/E of 10 and a dividend yield of 2.2%, it's hard to imagine a better bargain out there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's financial sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.