SunTrust: No Such Thing as Safe in This Market

Atlanta-based SunTrust Banks, Inc. (STI) saw its stock price plunge with the rest of the financials over the summer and, while it never reached the depths that many financial stocks crashed to in July, the stock had lost—at its 52-week low—more than two thirds of its value from the previous summer. For SunTrust, long considered a bastion of probity and one of the strongest super-regional banks in one of the most economically vibrant parts of the country, the drop in SunTrust shares has been a sobering experience. Like many other banks at the present time, SunTrust has experienced an increase in non-performing loans. Unlike other banks, SunTrust has not had to resort to dilutive measures to raise capital. The company has been selling some of its large stake in the common stock of Coca-Cola Company (KO)—earned when its predecessor bank—Trust Company of Georgia—helped bring Coke public in the early part of the last century.

Ockham has recently downgraded STI to Overvalued after rating it Undervalued when the stock hit its nadir at $30.94 on July 11^th of this year. With the stock now trading in the low fifties, we believe that the valuation is over glide slope and could be vulnerable to a pull-back should a slowing economy negatively impact bank earnings in the coming months—which is likely! Only a take-over of the company would cause further upside from here and such a transaction, while always possible in this environment, would probably need to see a lower acquisition price for STI to come to fruition.

STI shares do pay an attractive dividend of close to six percent. Up until now, the company has defended the dividend, increasing it modestly within the past year. When compared to peers like Wachovia (WB), the company’s stock looks pristine and the dividend safe. However, as fallout from the credit market crisis of the past year continues to rattle our financial markets, there is a very real risk that pain will shift from Wall Street to Main Street. This will not help the earnings of banks such as SunTrust which need to rebuild their frail balance sheets.

Looking at Ockham’s standard valuation metrics, STI’s historic Price-to-Sales range is 2.10x – 2.65x. The stock currently trades at a Price-to-Sales multiple of 2.37x, which is slightly above the average of the range. STI’s Price-to-Cash Flow range is 12.29x – 16.48x. With the stock’s current Price-to-Cash Flow at 20.21x, this metric is flashing a strong warning and is what precipitated our Overvalued rating.

In sum, while STI shares have above-average safety compared to more beleaguered peers and the stock dividend is undeniably attractive, the company is in a sector which is at the very heart of the current economic firestorm that we find ourselves in. As such, investors interested in owning STI shares would do well to wait until either positive earnings revisions (unlikely right now) or a fall in price bring a more favorable Ockham rating on SunTrust.

Comments

[citricon:]

Suntrust is a crummy bank I hope they are the next to go out of business . I was working for a firm that called Citrico that Suntrust with the backing of Coca cola foreclosed on with no time to pay back debt not even one day and it was millions of dollars The excuse was Sarbanes Oxley.Citrico was a partner with Coca Cola to take waste from lemon processing so Coca cola could get lemon oil on the cheap. Coca Cola and Suntrust are bad lenders and they should be punished . They employed a criminal to do the liquidation named Kenneth Krys who ripped off the employees who worked for Citrico . I am glad sun trust is having a bad time I hope they get what they deserve

2008 Sep 28 12:15 PM