Find Serious Upside In Regions Financial

Sep.21.11 | About: Regions Financial (RF)

Regions Financial Corporation (NYSE:RF) is a holding company that provides retail, commercial, and mortgage banking services. During the last 3 months the stock has lost nearly 40% of its value. The majority of this loss occurred between July 26 and August 8, when other financial institutions were losing similar value during the market selloff.

The chart below shows the company's stock over the last 3 months, which appears to have found a trading range during the last month. It also shows the stock's performance compared to the S&P 500, which reflects a substantial loss compared to the index.

The stock trades with a market cap of $4.76 billion including 74% institutional ownership. The stock maintains a hold rating, with 13 out of 17 analyst rating the stock a hold, and 2 analyst upgrading to a strong buy. The average price target for Regions is $6.38, a gain of 68% from its current price, which is near 52-week lows.

Analyst ratings and price targets have increased while the stock price has decreased over the last few months. A major reason for the upgrades has been the company's improved financial statements during the last 3 quarters. The last 3 years the company has posted a net loss, with each year showing improvement. This year the company is on pace to post its first year of net income since 2007. I find the financial progress Regions has made remarkable: in 2010 it posted a net loss of $539 million, but after 2 quarters this year the company has already posted $106 million in net income, and appears to be growing stronger.

The company has decreased its total assets each of the last 3 years in an attempt to strengthen its balance sheet. I believe the efforts are proving to be successful, as loan loss provisions have been reduced by nearly 40%, along with improving the number of uncollectable loans. The company has improved in many areas, but still needs to focus on growing and improving other areas of the company.

Income has substantially improved over the last 3 years, with 2011 on pace to post its first year of net income, despite decreased sales. Since 2007 the company's total revenue has declined by nearly $3 billion, a significant amount for a company with $8.2 billion in 2010.

The company has a large portion of total loans that are uncollectable, and while it's improved, it's still relatively high compared to other regional banks in the industry. The company also has a high number of delinquent loans, and while this number has improved as well, it's still high for the industry. These two measurables look at the company's assets and show the mistakes it may have made in the past. However, the margins are improving as the company appears to be making better decisions regarding loans.

I believe that a $6.38 price target is both realistic and achievable for this stock. The company has drastically improved over the last 3 years, with 2011 on pace to continue the trend. I find it encouraging that Regions can post net income while sales are weak, because it shows the improvement of the company's balance sheet and its decision on capital positions. I believe the company will only get stronger over the next several years as it continues to strengthen its balance sheet and make better decisions with loans. Therefore, I place a personal price target of $12.00 over the next 2 years, as I expect the company to continue improving and the market to substantially recover.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RF over the next 72 hours.

Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy. All information and statistics were obtained from the listed source.