Why FNB May Fall, Huntington Safer

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 |  Includes: FNB, HBAN
by: Takeover Analyst

In an earlier article here, I explained why Huntington Bancshares (NASDAQ:HBAN). had incredibly strong risk/reward. Since then, the stock has appreciated by 17.7%, beating the Dow Jones by more than 1,000 bps. Going forward, I believe that much of the value gap has been closed but am still more optimistic than the "hold" rating on the Street. Downward multiples pressure at FNB Corporation (NYSE:FNB), on the other hand, warrants closer to a "sell."

From a multiples perspective, Huntington is significantly the cheaper of the two. It trades at a respective 11.8x and 9.7x past and forward earnings while FNB trades at a respective 17.5x and 14.8x past and forward earnings. With that said, the latter does have a dividend yield that is 120 bps higher at 3.9% and considerably less volatility. After appreciating by more than 45% since the start of October, however, FNB will have to answer more to the macro pressures.

At the fourth-quarter earnings call, Huntington's CEO, Steve Steinour, noted two main setbacks in the challenging economy:

"We report a net income of $126.9 million or $0.14 per share, up 3% from a year ago but down 12% or $0.02 from the third quarter. There were 2 factors that impacted this quarter's results. First was the anticipated impact of the reduction of electronic banking income due to the implementation of the Durbin Amendment related to a debit card fee reduction. The total impact for the quarter was $17.3 million.

The second was the absence of an automobile loan securitization gain as the third quarter included a $15.5 million gain. As we noted last quarter, we intend to use automobile loan securitizations to manage our overall balance sheet risk exposure to automobile loans and expect to have such securitization gains from time to time but not likely every quarter. In that regard, at the end of the year, we transferred $1.3 billion of automobile loans to held for sale in anticipation of another securitization during the first half of 2012".

The end result, despite these issues, was that EPS came out in line with consensus. Management has stated earlier that NIM pressure would be modest. Well, as it turns out, NIM actually grew by 4 bps sequentially to 3.38%, mainly due to deposit pricing improvement. Huntington has taken several efforts to grow the top-line, but its success largely hinged on a favorable loan environment and higher rates. Moreover, these growth efforts are cutting into margins at a time when competitors are slashing expenses. Even still, the Optimal Customer Relationship Model and Fair Play Banking goes a long way to mitigate the reliance on a macro recovery. The improvement of the firm's credit quality further will attract more risk-averse investors.

Consensus estimates for Huntington's EPS forecast that it will grow by 3.4% to $0.61 in 2012 and then by 6.6% and 6.2% more in the following two years. Assuming a multiple of 11.5x and a conservative 2013 EPS of $0.61, the rough intrinsic value of the stock is $7.02, implying 18.6% upside. Modeling a CAGR of 5.4% for EPS over the next three years and then discounting backwards at a WACC of 9% yields an even higher figure at $8.87.

After such a tremendous bull run, FNB may have a hard time justifying its premium. Several points, however, support the case. First, the company has outperformed in loan growth and is well positioned for accretive M&A. Second, it is not as exposed to Europe as its competitors are. Third, the expense reductions from the Parkvale deal will help boost margins.

Consensus estimates for FNB's EPS forecast that it will grow by 18.6% to $0.70 in 2011 and then by 21.4% and 12.9% more in the following two years. Assuming a multiple of 15x and a conservative 2012 EPS of $0.80, the firm is roughly at fair value. If, however, the multiple dips to 13x - more reasonably in line with peers - and 2012 EPS turns out to be $0.80, the stock would fall by 16.3%. Accordingly, I share the bearish sentiment on the Street in regards to FNB.

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