When I selected regional lender Zions Bancorporation (NASDAQ: ZION) as my pick for the best stock for 2011 a few months ago,financial stocks in general were enjoying a surge of buying interest and wave of relative strength. Zions seemed a strong financial company, and ZION stock had the potential to outperform the market big time.
All of this has unwound a bit lately, however, and Zions stock is off about -5% year-to-date. Financial stocks (and ZION in particular) have come under pressure as regulators selected winners and losers for capital returns to shareholders after conducting another round of “stress tests” to measure the health of the 19 largest U.S. banks. Since January, the S&P 500 has gained 2.7% while the Financial Select SPDR (NYSE: XLF) is down 0.7%.
So what’s next for Zions Bancorp?
The long-term story is still very positive — positive enough that Credit Suisse analysts upgraded ZION stock to “Outperform” recently on expectations of higher earnings from reduced credit losses, strong loan growth, and reduced cost of issuing debt to repay government TARP funds.
Overall, the team led by Craig Siegenthaler has raised its target price from $26 to $32 (representing 40%+ upside) and estimate a 90% return in the stock over the next two to three years. He adds that the stock will likely benefit from a probably earnings beat in mid-April when 1Q11 results are reported. Moreover, the stock is attractively valued and trades at a 20% discount to its peers on normalized earnings and tangible book value despite its improving loan book and exposure to fast growing communities in the southwest.
Net charge offs, or loans that have been written off, are set to fall from $251 million in 4Q10 to $170 million in 1Q11. The key here are signs of stabilization in the Las Vegas real estate market. While the latest Case-Shiller Home Price Index data for January showed seven-straight months of declines for housing prices nationwide; Las Vegas home prices have been level since last September.
This, combined with an improvement in the local economy and a rise in gaming revenues, is helping to reduce delinquency and foreclosure rates.
With ZION consolidating in a four-month trading range, downside risk is minimal while upside potential is huge based on fundamental business improvements and a discounted valuation. Watch for another update on ZION in April.
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