SunTrust Bank, Inc. (STI) reported its first-quarter 2010 results on April 21. Operating loss for the reported quarter came in substantially lower than the Zacks Consensus Estimate. Investors were clearly not very impressed by the lower loss as the company is still making losses.
As a result, the shares of SunTrust moved down slightly following the earnings release. However, analysts covering the stock now have responded positively as they had sufficient time to absorb and consider the fundamentals.
Let’s now cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both the short-term and the long-term outlook for the stock.
Earnings Report Review
Beating the estimates considerably is a definite positive for the stock price. However, there are several negatives that have kept the company unprofitable. Also, soft revenue and weak loan demand as a result of recessionary pressures will continue to hurt earnings until the economy rebounds to its historical highs.
The beat reflects the benefit of lower non-interest expense, chiefly due to a decline in credit-related expenses. A recent trend of declining provision for credit losses and a strong capital position were also among the positives.
Revenues on a fully taxable-equivalent basis decreased 14.2% year-over-year to $1.9 billion. The year-over-year decrease was due to a decline in non-interest income, partially offset by an increase in net interest income. Non-interest expense for the reported quarter came in at $1.4 billion, down 36.8% from the prior-year quarter. The decline in non-interest expense was primarily a result of lower credit-related expenses.
(Read our full coverage on this earnings report: Zacks Blog: SunTrust Beats, Loss Narrows)
Earnings Estimate Revisions – Overview
Following the earnings release, estimates have radically moved up. The estimate revision trends and the magnitude of such revisions justify strength in the stock. We will now go through the details of the earnings estimate revision to substantiate why an investor would be interested in this stock.
Agreement of Estimate Revisions
Looking at the estimates revision trends, it becomes clear that a majority of the analysts have agreed on the positive FY2010 outlook for SunTrust earnings. The following table shows that 18 analysts have raised estimates for FY2010 and 8 have moved in the opposite direction over the last 30 days.
However, for FY2011, 8 analysts have increased the estimates, while 12 downward revisions were witnessed. The higher number of upward estimate revisions for FY2010 indicates a likelihood of upward pressure on the performance of the stock in the near term.
Magnitude of Estimate Revisions
Estimates for FY2010 improved significantly from a loss of $1.40 per share to a loss of $1.23 since the earnings announcement. The significant magnitude of the upward estimate revision for FY2010 indicates why SunTrust is worth adding to an investor’s portfolio. However, the estimates for FY2011 moved down from earnings of $1.03 per share to earnings of 97 cents.
Our Take
We are concerned about SunTrust’s exposure to Alt-A mortgage and construction loans, which have been facing headwinds. Besides, higher mortgage rates and slow home sales will restrict growth in mortgage income. However, cost containment measures have been allowing SunTrust to increase investments and it is experiencing signs of stabilization in its credit metrics. We expect the continuation of NIM (net interest margin) expansion with the help of low cost funding to support the bottom line in the upcoming quarters.
The estimate revision trends, magnitude of revising the estimates and lower number of downward estimate revisions for FY2010 clearly portray the potential for significant upward pressure on the stock over the near term.
However, SunTrust shares are maintaining a Zacks #3 Rank, which translates into a short-term Hold recommendation.
Considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “STI”
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