What follows is a list of regional banks with various degrees of upside. I find that financials, in general, are substantially undervalued due to an irrational amount of risk discounting after the economic decline. Value investors willing to think above this low bar are in a strong position to benefit from higher returns when multiples and profits normalize. These three companies highlighted below all have impressive fundamentals and more reliable earnings than what the markets appreciate. Instead of valuing businesses by past performance, investors ought to value them by future performance. The disconnect between the two tilt financials heavily towards reward over risk.
BB&T (BBT)
BB&T trades at a respective 14.9x and 10.5x past and forward earnings with a dividend yield of 2.5%. Consensus estimates for BB&T's EPS forecast that it will grow by 46.4% to $2.68 in 2012 and then by 12.3% and 11.3% in the following two years. Assuming a multiple of 12.5x and a conservative 2013 EPS of $2.97, the stock would hit $37.13 for 17.6% upside.
Management remains committed to returning free cash flow to shareholders, as evidenced by the recent 25% dividend hike. It has been boosting dividends consistently for the last four decades. The goal is to get the dividend payout ratio to a midpoint of 40%. Perhaps the most important area to look at when judging a financial company is the capital position. From that perspective, BB&T is very strong. It has a Tier 1 Capital Ratio of 12.5% and thus won't be a regulatory target any time soon.
Wells Fargo (WFC)
Wells Fargo trades at a respective 11.4x and 9x past and forward earnings with a dividend yield of 2.7%. Consensus estimates for Well Fargo's EPS forecast that it will grow by 16.3% to $3.28 in 2012 and then by 12.2% in both of the following two years. Assuming a multiple of 12.5x and a conservative 2013 EPS of $3.65, the stock would hit $45.63 for 38.1% upside.
The company focuses on lending and has meaningfully reduced its risk profile. Wells Fargo has brought in strong returns in equity with meaningful increases in scale. By acquiring Merlin Securities, the company has finally entered the brokerage business, which will bring about greater margins and cross-selling opportunities. I strongly recommend the stock as a way to capitalize off of financial innovation.
Huntington (HBAN)
Huntington trades at a respective 10.5x and 9.7x past and forward earnings with a dividend yield of 2.5%. Consensus estimates for Huntington's EPS forecast that it will grow by 8.5% to $0.64 in 2012 and then by 4.7% and 13.4% in the following two years. Assuming a multiple of 12.5x and a conservative 2013 EPS of $0.64, the stock would hit $8 for 23.3% upside.
During the first quarter, revenues grew 9% sequentially off of mostly non-interest income gains. Credit quality has also seen meaningful improvements. Non-accrual loans were up 14% as capital the tangible common equity ratio hit 8.33%. I am further optimistic about the Fidelity Bank integration, which will unlock revenue and cost synergies over time. With a beta of 1.7, the company is well positioned to recover much of its lost shareholder value since the financial crisis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.
