In this article, let's take a look at BB&T Corp (BBT, Financial), a $27.44 billion market cap company with assets of $187 billion on September 30, 2014. It is the 11th-largest U.S. bank by assets, operating some 1,750 branches, mainly in the Southeast U.S.
Good outlook
This well-managed regional bank is in good position to benefit from an improving economy. In 2012, the company expanded by 7%, and we think it could improve in the near future. In an environment with higher interest rates, interest income will improve. Further, we expect that the noninterest income will also improve through its insurance operations. Wealth management and investment-banking services should also benefit from an improving economy.
Principal risk
The principal risk we can project is a lower U.S. economic recovery, especially in Virginia, North Carolina, Florida and other Southern states. A slower recovery could affect loan losses. Other risks include the regulatory or legal rules. The obligation of more capital, obviously affects returns.
Revenues, margins and profitability
Looking at profitability, revenue declined by 2.64%, but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.71 vs $0.37). During the past fiscal year, the company reported lower earnings of $2.18 versus $2.70 in the previous year. This year, Wall Street expects an improvement in earnings ($2.72 versus $2.18).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| BBT | BB&T Corp | 9.15 |
| CIT | CIT Group Inc | 11.44 |
| ZION | Zions Bancorp | 4.12 |
| FRC | First Republic Bank | 11.04 |
| MTB | M&T Bank Corp | 8.6 |
| Â | Industry Median | 8.54 |
The company has a current ROE of 9.15% which is higher than the industry median and the ones exhibited by Zions Bancorp (ZION, Financial) and M&T Bank Corp (MTB, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, CIT Group (CIT, Financial) and First Republic Bank (FRC, Financial) could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 14.0x, trading at a discount compared to an average of 17.9x for the industry. To use another metric, its price-to-book ratio of 1.27x indicates a discount versus the industry average of 1.35x while the price-to-sales ratio of 3.01x is below the industry average of 3.65x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $17,674, which represents a 12.1% compound annual growth rate (CAGR).
Final comment
Its good presence principally in the state of Florida leaves the bank in a better position to profit from an improving economy. Regulatory capital levels may affect the capacity to increase dividends or repurchase common stock. BBT's board approved a common stock dividend increase to $0.24 from $0.23 but has not been an active repurchase of its stock.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Jeremy Grantham (Trades, Portfolio), David Dreman (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Tom Russo (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014, as well as Dodge & Cox.
Disclosure: Omar Venerio holds no position in any stocks mentioned
