DJIA 8952.02 -45.34 (-0.50%) S&P 500 1133.84 -4.65 (-0.41%) Nasdaq 1894.74 +3.66 (+0.19%) Value Line ndx 948.57 +3.26 (+0.34%) 30-Year Bond 107 4/32 +7/32 5.63% Yield
Excite Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> gained $7 5/8 to $93 1/2 as the Internet directory company and its partner Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> unveiled their new co-branded channels as part of a joint effort to redesign and expand the Netscape Netcenter Internet portal site. The new channels range from Arts & Leisure and Lifestyles to Games and Shopping. In May, Excite and Netscape announced a strategic partnership to build out channels on Netcenter. Excite paid Netscape $70 million up front, and in exchange, as co-founder Joe Kraus explained in last week's StockTalk interview, Excite gets to promote its brand on a substantial portion of Netcenter -- 50% of the space in year one and 65% in year two -- as well as sell ads for the website. On June 2, Excite announced it had signed $21 million in ads in just 12 days. Excite, which yesterday announced a 2-for-1 stock split payable July 20, also is counting on its increased presence on Netcenter as a way of attracting new customers to its products and services.
Milwaukee-based regional bank Firstar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSR)") else Response.Write("(NYSE: FSR)") end if %> soared $4 1/2 to $38 3/16 after The Wall Street Journal reported that the company and Cincinnati-based Star Banc Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STB)") else Response.Write("(NYSE: STB)") end if %> are "close to a merger that could be valued at $5 billion or more in stock." A merger would boost the two banks' positions in the rapidly consolidating banking industry, where Banc One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> is hooking up with First Chicago NBD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCN)") else Response.Write("(NYSE: FCN)") end if %> and Norwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOB)") else Response.Write("(NYSE: NOB)") end if %> is teaming up with Wells Fargo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFC)") else Response.Write("(NYSE: WFC)") end if %>. For Star, the merger would allow it to better compete against cross-town rival and one-time attempted acquirer Fifth Third Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %>, which recently has been expanding through an aggressive acquisition strategy. Star is a star performer, with a return on assets of 1.87% and a return on equity of 19.85%. Firstar's performance, on the other hand, has been less than stellar -- revenue growth has been slowing and it has yet to meet some of the financial goals it set for itself in its restructuring plan at the end of 1995. According to the Journal, Star CEO Jerry Grundhofer -- brother of U.S. Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USB)") else Response.Write("(NYSE: USB)") end if %> chief John Grundhofer -- is expected to run the day-to-day operations of the combined company, which would have 625 branches and assets totaling close to $35 billion.
QUICK TAKES: America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> was up $1 7/8 to $105 1/8 after selling 4.9 million shares in a secondary offering, raising around $500 million. The Internet service provider also announced a two-year $75 million agreement with three online brokerages to launch new brokerage and mutual fund centers that will be featured on AOL's Personal Finance channel... Other Internet companies also gained today. Lycos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> added $1 to $75 3/8; Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> climbed $3 1/16 to $157 1/2; and Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> advanced $1 to $99 3/4... San Francisco-based investment bank Hambrecht & Quist <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %> shot up $6 7/16 to $36 5/16 on talk that Credit Suisse First Boston may make an acquisition bid for the company... Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> gained $1 to $133 3/4 after announcing that the FDA has approved its Maxalt drug -- a disintegrating tablet that patients can take without water -- for the treatment of migraine headaches.
Telecommunications company Qwest Communications International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QWST)") else Response.Write("(Nasdaq: QWST)") end if %> rang up $1 1/4 to $34 7/8 after announcing that media giant Cox Enterprises Inc. has selected it to provide multimedia and voice services... Disk heads supplier Applied Magnetics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> powered up $1 5/16 to $7 5/8 on no apparent news as the New York Stock Exchange said the company had no comment on the fluctuations in its share price... Video game maker Midway Games <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWY)") else Response.Write("(NYSE: MWY)") end if %> racked up $1 11/16 to $15 5/8 after announcing it has shipped the new installment in its Mortal Kombat series to retailers for the PlayStation game console and Nintendo 64, and that some initial shipments have already sold through.
Information technology services and commercial staffing company Personnel Group of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGA)") else Response.Write("(NYSE: PGA)") end if %> added $2 1/16 to $20 after announcing it has acquired IMS Consulting Inc. of Irvine, California, which has roughly $9 million in annualized revenues... Waste management services company Waste Management International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WME)") else Response.Write("(NYSE: WME)") end if %> picked up $2 1/2 to $10 15/16 after majority owner Waste Management Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMX)") else Response.Write("(NYSE: WMX)") end if %> announced it will acquire the roughly 20% of publicly owned shares of the subsidiary for around $11.50 per American Depositary Receipt (ADR). The price represents a 36% premium to yesterday's closing price of $8 7/16... Nationwide Financial Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NFS)") else Response.Write("(NYSE: NFS)") end if %> gained $4 to $51 after Bear Stearns initiated coverage of the insurance company with a "buy" rating and predicted that the company's shares will reach $59 in 12 months.
Managed care workers' compensation services company Summit Holding Southeast <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHSE)") else Response.Write("(Nasdaq: SHSE)") end if %> surged $6 1/8 to $31 7/8 after announcing it has agreed to be acquired by Boston-based financial services company Liberty Mutual Group for $33 per share -- a 28% premium to yesterday's closing price... MasTec Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTZ)") else Response.Write("(NYSE: MTZ)") end if %> rose $2 1/8 to $23 7/8 after Morgan Stanley Dean Witter started coverage of the telecommunications company with an "outperform" rating with a price target of $32 and an EPS estimate of $2.20 for this year and $3.02 for next year... Contract staffing and outsourcing services concern AHL Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AHLS)") else Response.Write("(Nasdaq: AHLS)") end if %> advanced $1/2 to $39 3/8 after announcing it has received commitments from a syndicate of national banks to expand its credit facility to $150 million from $100 million. The company plans to use the facility mainly to make more acquisitions.
Oil and gas subsea contractor Stolt Comex Seaway S.A. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCSWF)") else Response.Write("(Nasdaq: SCSWF)") end if %> was lifted $1 3/8 to $19 3/8 as it announced the formal signing of a merger agreement to acquire diving specialist Ceanic Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIVE)") else Response.Write("(Nasdaq: DIVE)") end if %> for $20 a share in cash. Ceanic climbed $1/2 to $19 3/8. Earlier this month, the two companies announced a letter of intent regarding the transaction... Internet sports media company Sportsline USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLN)") else Response.Write("(Nasdaq: SPLN)") end if %> jumped $5 1/16 to $36 9/16 after Salomon Smith Barney reiterated a "buy" rating with a 12-month price target of $46... Locker maker American Locker Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALGI)") else Response.Write("(Nasdaq: ALGI)") end if %> was up another $2 to $30 following its payment of a 4-for-1 stock split last Friday... Snyder Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNC)") else Response.Write("(NYSE: SNC)") end if %> added $2 to $44 after one of its U.K. units won a four-year contract with pharmaceutical company Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> to sell two prescription skin products in the U.K.
Wireless communications distributor Brightpoint Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CELL)") else Response.Write("(Nasdaq: CELL)") end if %> gained another $1 11/16 to $14 1/2 as it extended an agreement to provide inventory management, accessory programs, repair, and refurbishment services to Omnipoint Corp. (OMPT) subsidiary Omnipoint Communications Services LLC... Cirrus Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRUS)") else Response.Write("(Nasdaq: CRUS)") end if %> jumped $1 19/32 to $11 1/8 on news that the chipmaker will introduce a semiconductor that can control a computer's disk drive on its own.
Hotel and casino operator Hilton Hotels Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT)") else Response.Write("(NYSE: HLT)") end if %> fell $2 7/8 to $28 5/8 after the company decided to take a tip from Rupert Murdoch and News Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %> and separate its operations into two units, one for lodging and one for gambling. To bulk up the casino business, the company will acquire the Tunica, Gulfport, and Biloxi, Mississippi gaming operations of Grand Casinos <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GND)") else Response.Write("(NYSE: GND)") end if %> for $1.2 billion, including $550 million in assumed debt. Shareholders of Grand Casino, which dropped $1 1/2 to $17 on the news, will come away with a 13.6% stake in the new gaming company. Hilton had been rumored to be on the acquisition trail, but most of the speculation centered on Hilton expanding its presence in Nevada by merging with Circus Circus Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIR)") else Response.Write("(NYSE: CIR)") end if %>. Unwanted and unloved, Circus Circus lost $1/2 to $16 15/16.
Several pharmaceutical companies offering anti-HIV treatments fell today after The Wall Street Journal reported that DuPont's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> not-yet-approved Sustiva drug could simplify the so-called "AIDS cocktails" used to treat the disease. The drug, a non-nucleoside reverse transcriptase inhibitor, could be combined with Glaxo Wellcome's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %> Combivir reverse transcriptase drug, which is a combination of the better known anti-HIV drugs AZT and 3TC. The article suggests that the new combination could wipe out the need for another class of drugs called protease inhibitors. While any development that may ease the suffering of HIV patients is definitely worth investigating, investors should keep in mind that researchers are still holding out the hope that all of the various anti-HIV drugs will be rendered unnecessary at some point on the development of an effective vaccine. In the meantime, Vertex Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRTX)") else Response.Write("(Nasdaq: VRTX)") end if %>, which develops protease inhibitors, fell $5 1/8 to $22 1/2, while rival Agouron Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AGPH)") else Response.Write("(Nasdaq: AGPH)") end if %> slid $3 1/16 to $30 5/16.
Electronic payment transaction processor CyberCash Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> lost its connection with some investors today, dropping $2 1/16 to $12 3/16 after announcing that it expects sales of $2.2 to 2.5 million for its second quarter -- which is considerably shy of expectations of roughly $3 million. In a bid to slash costs, the firm also said it will cut 20% of its staff. Revenues in the company's first quarter ($1.14 million) were also about half a million dollars short of expectations thanks to a temporary paralysis in the company's purchasing market induced by the integration of software payment company IC Verify. As well, in the present quarter the company has laid its revenue shortfall at the feet of the acquisition, noting that customers delayed some purchases while they assessed the merger.
QUICK CUTS: Media giant Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> slipped $7 11/16 to $105 1/2 after Morgan Stanley Dean Witter and Prudential Securities both cut their fiscal 1998 EPS estimates, and Schroder & Co. downgraded the company to "perform in line" from "outperform"... Healthcare products maker Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> fell $3 to $74 after the FDA called for a revised warning label for heartburn medication Propulsid made by the company's Janssen Pharmaceutica unit after 38 people using the drug with other medication died from heart problems... Physician practice management and healthcare information services firm Advanced Health Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADVH)") else Response.Write("(Nasdaq: ADVH)") end if %> tumbled $3 3/4 to $5 1/2 after saying it expects a fiscal Q2 operating loss of between $3 million and $4 million due to the loss of a practice management contract, low software sales, and a failure to attract major new clients... Managed healthcare provider United HealthCare Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> dropped $2 1/8 to $63 11/16 after Donaldson, Lufkin & Jenrette downgraded the firm to "buy" from "recommend list."
Discount retailer Dollar General Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DG)") else Response.Write("(NYSE: DG)") end if %> fell $3 1/4 to $39 9/16 after reporting that its same-store sales and total revenues for June are, so far, below plan... Oil and gas exploration and production company Devon Energy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: DVN)") else Response.Write("(AMEX: DVN)") end if %> slid $1 3/4 to $34 15/16 after agreeing to merge with Canada's Northstar Energy Corp. in a stock swap valued at about $874 million... Ready-to-assemble furniture products maker Bush Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSH)") else Response.Write("(NYSE: BSH)") end if %> dropped $1 1/2 to $21 3/4 after being downgraded to "maintain" from "buy" at A.G. Edwards... Office products supplier U.S. Office Products Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OFISD)") else Response.Write("(Nasdaq: OFISD)") end if %> was shredded $2 3/4 to $19 1/2 after reporting fiscal Q4 EPS (after restructuring charges) of $0.13, missing the IBES mean estimate of $0.14 for the quarter. The company also said it will take a $190 million to $215 million restructuring charge in Q1 of fiscal 1999.
HMT Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMTT)") else Response.Write("(Nasdaq: HMTT)") end if %>, which makes thin film disks for computer disk drives, was spun for a $9/16 loss to $8 3/8 after saying its fiscal Q1 EPS will be below the $0.31 earned last year... Office and home furniture maker O'Sullivan Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OSU)") else Response.Write("(NYSE: OSU)") end if %> lost $7/16 to $14 after Wheat First Union downgraded the company to "outperform" from "buy"... Discrete semiconductors maker General Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEM)") else Response.Write("(NYSE: SEM)") end if %> moved down $5/8 to $9 7/8 after saying its fiscal Q2 earnings could decline more than 25% from last year's levels due to an order slowdown that could last until September... Electronic interconnect products maker Merix Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MERX)") else Response.Write("(Nasdaq: MERX)") end if %> slid $9/16 to $9 15/16 after reporting fiscal Q4 EPS of $0.16, in line with the First Call mean estimate. However, the company is expecting a Q1 loss of $0.25 to $0.30 per share due to the slowdown in the printed circuit board industry.
Steel and aluminum can maker Silgan Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLGN)") else Response.Write("(Nasdaq: SLGN)") end if %> was flattened for $2 1/8 to $28 after saying that slow sales and the acquisition of Campbell Soup's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %> can manufacturing business will result in fiscal Q2 EPS $0.15 to $0.20 below the Street's estimate... Automotive replacement tire distributor TBC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TBCC)") else Response.Write("(Nasdaq: TBCC)") end if %> suffered a blowout, falling $3/4 to $6 5/8 after saying its fiscal Q2 results will fall below last year's levels... Carbon and graphite electrodes maker UCAR International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UCR)") else Response.Write("(Nasdaq: UCR)") end if %> was knocked down $1 1/4 to $29 3/16 after saying its fiscal Q2 EPS will be about 10% below the $0.74 earned in Q1... MIPS Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MIPS)") else Response.Write("(Nasdaq: MIPS)") end if %> lost $9/16 to $13 7/16 after Silicon Graphics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGI)") else Response.Write("(NYSE: SGI)") end if %> sold 5.5 million shares, or about a 16% stake, in an initial public offering at a price of $14 per share. The company makes microprocessors for digital consumer products and video game systems.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
SunTrust Keeps on Shining
In all the hoopla over the consolidation of regional banks in the last 18 months, one major player has been left out of the running. But that has been by choice, apparently. SunTrust Banks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STI)") else Response.Write("(NYSE: STI)") end if %>, the largest bank by far in Georgia and one of Florida's largest banks, has remained independent from the likes of NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %>, First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %>, Barnett Banks, and Wachovia Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WB)") else Response.Write("(NYSE: WB)") end if %>. Nevertheless, its performance shows that it doesn't need to get together with a larger partner.
Over the last 12 1/2 years, the company has handily outperformed the S&P 500 by nearly four percentage points per year and has performed roughly in-line with the S&P Regional Bank stock index over the last two years. The interesting thing about SunTrust's financials is the value of the 48.27 million shares of Coca-Cola Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> on its balance sheet. And perhaps that's also why acquirers haven't stepped up to the plate on SunTrust. The presence of Coke stock has been an interesting talisman. Some fund managers dumping General Re <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRN)") else Response.Write("(NYSE: GRN)") end if %> because of the Berkshire Hathaway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A and BRK.B)") else Response.Write("(NYSE: BRK.A and BRK.B)") end if %> merger have most likely done so by reasoning (incorrectly) that Berkshire is a closed-end mutual fund. In the case of SunTrust Bank, Coca-Cola stock (minus a deferred tax liability associated with the stock) makes up just under 41% of SunTrust's shareholders' equity. It doesn't seem far-fetched that other bank boards and CEOs would stay away, even though by the same logic, most other insurance companies or banks could be seen as large closed-end bond funds.
That aside, the way to look at SunTrust outside of the Coke holding is to simply take that stock off SunTrust's balance sheet. To do that, you have to make an adjustment to both side of the balance sheet. Back out the value of the shares straight from assets, then back out the tax liability (the tax rate times the unrealized appreciation in the shares), and then take out the residual of the asset minus that tax liability from owners' equity. The residual value is found in the "Accumulated other comprehensive income" line of owners equity. SunTrust also puts the value of the Coke shares in its footnotes.
To figure out the value of the company, you would have to make the same adjustments to the market capitalization. As in figuring out enterprise value (market capitalization plus debt minus cash and marketable securities), you would have to back out the net value of the Coke stock from the economic price one would have to pay to acquire SunTrust. Once you've made these adjustments to SunTrust, you're ready to go to work on looking at how productive the bank is. (By the way, this treats the Coke stock as sacrosanct. In other words, I don't think SunTrust's board is making loans against the value of the Coke stock to wildcat oil drillers and developers building skyscrapers on spec.)
Having made these adjustments, SunTrust looks a heck of a lot more productive than the raw financials would indicate. Without these adjustments, it appears as though the company earns only a 13.2% return on equity, which would be a pretty paltry return for a major regional bank. Further, without backing the value of Coke out of the enterprise value, the company would be selling at nearly 25 times amortization-adjusted earnings (goodwill amortization taken out of expenses). With a return on assets of 1.2%, you would think there's some sort of SunTrust manic short-squeeze on. It would be a pricey bank at these numbers.
Working around the tax-adjusted value of Coke, though, one sees a company generating a return on equity of 21% and a return on assets (before goodwill amortization) of 1.28% over the last twelve months. Further, the company would be priced at 22 times amortization-adjusted earnings. On the basis of ROE, the company is 12.3% more productive than a composite of money center and superregional banks. That would also explain its current 17.9% premium (on trailing earnings) over the P/E for the rest of the large banking group.
Another way to look at a bank holding company's current valuation is to compare its return on assets with its price-to-tangible assets multiple. ROA may be a better number to look at because that's a better indicator of a bank's performance than ROE. A low ROA company can pump up its ROE with lots of leverage. ROA, on the other hand, is the same thing as ROE -- that's to say that net margin and assets turns are in there -- but without the leverage (assets to equity ratio). The correlation between price-to-tangible assets and ROA is much better at 0.69 than is the correlation between price-to-tangible book and ROE at 0.54. In other words, ROA decides 69% of the price of a banking company's value while ROE decides 54% of its value. On this basis, SunTrust is pretty fairly valued at an adjusted price-to-tangible assets ratio of 0.2685.
Aside from the technical stuff, which might be enlightening to some and boring to others, SunTrust's franchise is growing rapidly. Without making any sizable acquisitions, the company's earning assets have grown at a compound rate of 10.5% per year over the last two years, which means the company is outperforming average economic growth in the country. Being in the right region is the first part of this -- Atlanta is still growing quickly, which is a big help. Its trust and investment business is the largest part of noninterest income, which is a good thing, as this is a business that doesn't need as much capital as other banking lines. It's really the company's noninterest income lines that are performing, which is what you want to see in banking. Total noninterest income has grown at 14.5% per year over the last two years while net interest income after loan losses has only grown at a compound annual rate of around 6.3%.
Over this period, the company has been a comparatively cost-conscious bank, as its efficiency ratio (which is analogous to operating expenses divided by revenues) has stayed right around 60. With net buybacks of $431 million over the last twelve months and dividends of just under $200 million, the company's "owner's yield" is a fine 4.2% of its adjusted enterprise value. With continued asset growth outpacing economic growth, further gains in its noninterest income lines of business, and the Coke stock having a meaningful impact on the company's equity base, SunTrust should be a good performer among the regional bank sector for the foreseeable future.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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