SunTrust: Financial Winner
The broad indexes ended mixed as the rhetoric in Washington over the coming showdown between President Obama and the Republican leadership of the House of Representatives grew nearer.
After the president said at a press conference on Monday that "America cannot afford another debate with this Congress about whether or not they should pay the bills they've already racked up," Speaker of The House John Boehner (R., Ohio) said in a statement that "raising the debt limit without making serious spending cuts and reforms could result in another credit downgrade for the United States," referring to the possibility of a rate cut by Fitch Ratings.
The KBW Bank Index (I:BKX) rose 1% to 53.31, with all but four of the 23 index components showing gains, as investors awaited a slew of earnings reports over the coming days. JPMorgan Chase, Goldman Sachs, Bank of New York Mellon and Comerica are all scheduled to announce their fourth-quarter results before the market opens on Wednesday.
SunTrust's shares trade for 1.1 times their reported Sept. 30 tangible book value of $25.72, and for 10.74 times the consensus 2013 earnings estimate of $2.69 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $2.97.
The company will announce its fourth-quarter results on Jan. 18, with analysts expecting a profit of 61 cents a share, declining from $1.98 in the third quarter, but increasing from 13 cents in the fourth quarter of 2011. Both prior periods reflected one-time items.
During the third quarter, SunTrust strengthened its balance sheet by selling its holdings of Coca-Cola (KO) shares, for a pre-tax gain of $1.9 billion. SunTrust also reported a $371 million provision for mortgage repurchase claims during the third quarter, saying that the move had boosted its putback reserves "to a level that is expected to cover the estimated losses on loans sold to Government Sponsored Enterprises (GSEs) prior to 2009." The fourth-quarter 2011 results reflected an elevated mortgage putback provision, as well as a negative mortgage servicing rights valuation adjustment, in light of the expected effect of the expanded Home Mortgage Refinance Program, or HARP 2.0.
JPMorgan analyst Vivek Juneja rates SunTrust "Overweight," with a price target of $32.50, estimating that the company will report fourth-quarter earnings of 65 cents a share, with a 2013 EPS estimate of $2.78, increasing to $3.10 in 2014.
Juneja said in a report on Jan. 8 that "SunTrust should be one of the biggest beneficiaries from housing market recovery," as the company "has had an unusually large drag from mortgage related issues on several fronts versus peers." The analyst added that the stock's "valuation is also attractive as STI trades below regional peers based on tangible book multiple."