What follows is a list of financial companies with various degrees of upside. Overall, I am most bullish about SunTrust due to its impressive momentum, strong management, liquidity, and high volatility. I believe the firm is less of a regulatory target than what the market acknowledges and this will help drive high risk-adjusted returns given the firm's beta of 1.5. BB&T, on the other hand, has low volatility, and I recommend financials only for investors looking to generate abnormally high returns. It is difficult to generate high returns without significant risk. Lastly, Capital One remains compelling due to its series of accretive takeovers.
SunTrust Banks (STI)
SunTrust trades at a respective 17.6x and 8.6x past and forward earnings with a dividend yield of 0.9%. Consensus estimates for SunTrust's EPS forecast that it will grow by 60.6% to $1.75 in 2012, and then by 52% and 11.7% in the following two years. Assuming a multiple of 11x and a conservative 2013 EPS of $2.64, the stock would hit $29.04 for 26.2% upside.
During the first quarter of 2012, net interest income went up from higher loan balances, lower cost deposit growth, and lower funding costs. Perhaps most importantly, the firm's balance sheet meaningfully improved. Performing loans rose 3% while high-risk loans fell. At the same time, credit quality improved as net charge-offs fell 11% sequentially. Better yet, SunTrust's capital ratios were well above regulatory requirements. I recommend buying.
BB&T trades at a respective 14.7x and 10.3x past and forward earnings with a dividend yield of 2.6%. 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 19.2% upside.
Of the 33 revisions to EPS, all 29 have gone up for a net change of 3.6%. Nevertheless, the stock is still rated a "hold" on the Street (source: NASDAQ). Management has showcased strong confidence over free cash flow by boosting the dividend yield 25% recently. BB&T is also very strong in terms of liquidity with a Tier 1 Capital Ratio of 12.5%. Thus, while many financial investors are fearful about the implications of Dodd-Frank, BB&T is relatively safe from a regulatory standpoint. I recommend a "hold".
Capital One (COF)
Capital One trades at a respective 6.8x and 7.6x past and forward earnings with a dividend yield of 0.4%. Consensus estimates for Capital One's EPS forecast are that it will decline by 14.1% to $5.84 in 2012 and then grow by 14.9% and 12.1% in the following two years. Assuming a multiple of 10x and a 2013 EPS of $6.90, the rough intrinsic value of the stock is $69 for 31.9% upside.
According to NASDAQ, the stock is rated a buy and 19 of 25 revisions to EPS have gone up for a net change of 10.2%.
During the first quarter of 2012, the domestic card segment showed improving credit as purchase volumes increased. With that said, revenues declined margins fell. Even though the top-line was not were I hoped, I am optimistic about the firm's trajectory of greater market share. Overall, results were fairly strong, especially in light of the accretive ING Direct acquisition. With the company now having its heart set on integrating the HSBC Card business, Capital One is well positioned to strategically increase scale. I recommend buying.