At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Sell that bank!
When the U.S. government declared Regions Financial (NYS: RF) sufficiently solvent to pass a very strict stress test last month, that probably sounded like good news to you. When the bank itself confirmed last week that, apparently unstressed, it would proceed to repay the U.S. Treasury the entire $3.5 billion it had been loaned under TARP -- on top of a further $593 million in preferred dividends since it was bailed out back in 2008 -- that sounded like even better news. But one banker in particular remains unimpressed.
Last week, just before investors broke for the weekend to begin hiding Easter eggs 'midst the spring foliage, Citigroup (NYS: C) snuck out a series of new ratings on America's regional banks. Regions, despite its multiple "good news" items, got slapped with a noncommittal "neutral" rating. So, too, were Southeastern bankers SunTrust, and First Horizon, Huntington Bancshares, Zions Bancorp, First Niagara Financial, and SVB Financial as well.
Faring even worse were Comerica (NYS: CMA) and the dividend-generousNew York Community Bancorp (NYS: NYB) , initiated and downgraded, respectively, to "sell." In fact, out of all the banks surveyed, the only one that Citi found worthy of its clients' investing dollars was Cleveland-based KeyCorp (NYS: KEY) , recipient of an upgrade and a brand new "buy" rating.
So it seems not everyone shares JPMorgan Chase's opinion that all signs in the economy are now flashing green. To hear Citi tell it, they're instead flashing "grim" for many of America's smaller bankers.
Why so glum, chum?
What has Citi so down on its banking brethren these days? Primarily, the prices investors are being asked to pay to own a piece of the action. For example, the analyst calls Comerica "a well-run company with a highly talented and capable management team." Yet as much as Citi likes the bank per se, the analyst argues that Comerica's 15-times-earnings share price makes this "a bad stock at its current price."
Similarly, Citi gives a nod in the direction of NYB's generous 7.2% dividend yield, but no sooner does it do so than Citi warns that "it is more likely than not that bank regulators will require NYB to reduce its dividend given that ... NYB's dividend payout ratio will likely be in excess of 95% in '12 and could exceed 100%." The analyst also sees little hope that NYB will be able to "materially grow or retain its earnings in '12," or even in 2013 for that matter.
Not all agree
Given the generally dour mood of the market following Friday's unemployment numbers, I think it's important to point out that not all analysts share Citi's dismal view of these stocks. For example, at NYB, Citi's prediction of little or no earnings growth runs counter to Wall Street's prevailing view that NYB can grow earnings at a modest 4% annually over the next five years. Meanwhile, the Street consensus estimate of 14.5% long-term earnings growth at Comerica suggests that the stock's 15 P/E ratio isn't really all that high -- and may even be cheap, given that the stock also pays a 1.2% dividend yield.
Indeed, it's curious that Citi would single out Comerica for punishment at the same time as it assigns an opposite rating of "buy" to KeyCorp, which looks close to as fairly valued (9.5 P/E, 9% growth rate, and a 1.4% divvy) as does Comerica. If you ask me, the stocks of SunTrust and Zions are more deserving of "sell" ratings than either of the two victims Citi selected. Both are predicted to grow slower than Comerica yet sell for P/E ratios about 10 points higher than the 15 P/E at Comerica!
But I guess you can't hope for too much consistency from Citi. When you remember that Citi itself costs 9.6 times earnings, sports a 9.6% growth rate, offers a negligible dividend, and just failed the stress test, if logic were a required element of its ratings, Citi would pretty much have to advising selling itself, too.
At the time thisarticle was published The Motley Fool owns shares of Huntington Bancshares, KeyCorp, and Citigroup, but Fool contributorRich Smithowns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 377 out of more than 180,000 members. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.