Published:
June 28, 2007
SunTrust Banks (NYSE: STI, $85.92) is one of the largest regional banking firms in the U.S. The company
operates 1,600 retail branches, mainly in the Southeast and Mid-Atlantic
regions of the U.S. Aside from traditional banking, STI also offers asset
management and stock brokerage services to its customer base. In total, STI
serves more than 3.8 million retail clients and 400,000 business customers.
Competitive Advantages
SunTrust's primary advantage lies in its location -- the Southeastern U.S.
is the fastest-growing region of the country in terms of population. And
that trend is projected to continue as retiring Americans migrate from the
Northeast to the milder climate of Sunbelt states like Florida.
Since STI operates one of the largest branch networks in this attractive
region, it gets more than its fair share of deposits. Particularly
attractive are the company's branches inside regional retailers, such as
discount stores and grocery outlets. In-store bank branches are relatively
inexpensive to build and allow for rapid expansion into new markets. Strong
population growth and a superior retail branch network spell a fast-growing
deposit base for SunTrust.
The company's lending conservatism is another major advantage. SunTrust has
maintained a rigid lending discipline over the past few years. This stands
in stark contrast to some other regional banks in the Southeast, which have
made more aggressive mortgage and construction loans in the midst of a
booming regional housing market. As a result, STI isn't feeling the same
sting of non-performing loans that many of its competitors are facing.
Growth Drivers
As you might expect, one potential growth avenue for STI is further
expansion in its rapidly growing regional market. While the bank already has
a large presence in the Southeast, it has far from penetrated all attractive
markets.
The second growth driver from an earnings standpoint is cost-cutting. After
seeing its profitability dip over the past few years, STI has initiated an
efficiency and cost-cutting campaign to reverse that trend. While it's still
early in the process, the company reported $29 million in cost savings in
just the first quarter of 2007. Going forward, management expects cost
savings to total close to $150 million. These cost-cutting measures should
eventually lead to stronger bottom-line results.
Finally, fee-based businesses are yet another potential growth driver.
SunTrust has been involved in investment banking for nearly a century. In
fact, the company was one of the banks that helped bring Coca-Cola public in
1919. These investment banking operations have been growing solidly in
recent years, and the company is also involved in other fast-growing
business lines, including asset management and trading.
These fee-based operations should provide a diversified revenue stream and
should insulate the company against a downturn in its core lending business.
Valuation and Outlook
STI trades at just under 14 times 2008 earnings estimates and has a
long-term projected earnings growth rate of roughly +8%. While that
represents a slight valuation premium to the average regional bank, we
believe the premium is warranted by the company's advantageous geographic
presence, as well as the potential for earnings to accelerate over the next
few years as recent cost-cutting measures gain traction.
There are two other positive factors worth mentioning. First, STI recently
announced plans to sell around 9% of its position in Coca-Cola -- a legacy
left over from Coke's 1919 IPO. The proceeds of that sale will be used for
shareholder-friendly moves -- management plans to repurchase as much as $1
billion worth of stock in 2007 alone. On top of those buybacks, STI offers
an attractive 3.3% dividend yield.
Secondly, STI is ripe for a takeover. A host of large regionals and money
center banks would love to grab the company's extensive branch network and
customer base in the Southeast. While we never recommend buying stocks
solely for their takeover potential, this is another factor worth
considering.
Paul Tracy
Editor
StreetAuthority
Market Advisor
About the Market Advisor
This monthly investment newsletter is
a highly diversified service -- the Market Advisor covers income
investments, undervalued stocks, aggressive growth plays, international
investments, exchange-traded funds (ETFs), and just about everything else in
between. As a result, you're certain to find a variety of investing ideas that
are well suited for your portfolio. (Learn
More)
About Paul Tracy
Paul Tracy co-founded StreetAuthority.com and became the firm's
Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in
2006. Prior to that he spent several years as Managing Editor at a multi-million
dollar financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also responsible
for equity research and managing a team of seasoned professional financial
writers, researchers and market commentators.
Paul's previous experience includes a position at Robert W. Baird & Co.'s
full-service brokerage operations as well as economic research work on a Money
and Banking project funded by the National Bureau of Economic Research. He has
also spent time doing outside consulting and research for the University of
Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
the U.S.
Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
To learn more about Paul Tracy's premium investing newsletter -- the
Market Advisor -- please visit
this link.
|
