Financial Analysis
The report provides the comparative analysis of Sun Trust Banks Inc. (STI) vs. U.S. Bancorp. (USB) using the following valuation tools:
Price/Book Value,
Price/Earnings per Share
Price/EBITDA per Share.
The paper also compares these ratios to industry average.
Price/Book Value
A Price/Book Value is a valuation ratio used to measure the market value of a company after all the liabilities has been deducted from the company assets. In other words, Price/Book Value is a valuation ratio generally used by investors to compare a stock’s per-share price (market value) of a company to its book value (shareholders’ equity). Typically, it reveals the estimation of value of a company after it has been liquidated showing remaining net assets entitled to shareholders after a company is liquidated.
There are two methods to calculate the Price-to Book Value of a company. First, we can divide the company market capitalization by company’s total equity. Alternatively, we can divide the current share price by the book value per share. Generally, low price book value reveals that the company stock is undervalued.
The report uses the first technique to calculate the Price-to-Book Value for the Sun Trust Banks Inc. (STI) and U.S. Bancorp. (USB)
Formula:
Price-to Book Value= Market Capitalization / Total Equity
Sun Trust Banks Inc.
Price-to Book Value= 14.80/20.06
Price-to Book Value=0.74
US Bancorp. (USB)
Price-to Book Value= 63.80/38.99
Price-to Book Value=1.63
Comparative analysis of the Price-to-Book value of the Sun Trust Bank and U.S. Bancorp reveals that U.S. Bancorp has higher Price-to Book Value than the Sun Trust Bank. The data reveals that Sun Trust bank is presently undervalued since its Price-to-Book value is 0.74, which is below one. On the other hand, U.S. Bancorp Price-to Book Value is 1.63 revealing that the company market value is better than the market value of Sun Trust Bank. The market capitalization of U.S. Bancorp ($63.8 Billion) is even larger than the Sun Trust’s market capitalization ($14.5 Billion) revealing that U.S. Bancorp is larger than the Sun Trust Bank. (Yahoo Finance, 2013).
Price/Earnings per Share
Price / Earning per Share is a valuation ratio used to measure the current share price of a company compared to its per-share earnings. Typically, the P/E ratio is the price an investor is ready to pay for the stocks relatively to their underlying earnings.
Formula used to calculate Price/Earnings per Share is as follows:
US Bancorp
Price/Earnings per Share = Stock Price / EPS
Price/Earnings per Share = 34.03 / 2.85
Price/Earnings per Share =11.94
Sun Trust Bank
Price/Earnings per Share =27.2/2.94
Price/Earnings per Share =9.25
Comparative analysis of the P/E ratio of the two companies reveals that investors will be willing to invest in the U.S. Bancorp than the Sun Trust Bank because the P/E ratio of U.S. Bancorp Bank (11.94) is higher than the P/E ratio of the Sun Trust Bank (9.25). Thus, investors will be generally earning more from every dollar invested in the U.S. Bancorp than the Sun Trust Bank. However, Price/Earnings per Share of both companies are still underperforming than the industry average (13.8) indicating that they are less attractive to investors. (Yahoo Finance, 2013). Typically, a sophisticated investor will be willing to invest in other industry than the banking industry.
Price/EBITDA per Share
Price/EBITDA per Share is the method to calculate the company stock price to its share “Earning before Interest, Taxes and Depreciation and Amortization.”
The data from the company income statements are used to calculate the Price/EBITDA per share.
Sun Trust Bank
EBIT=
1,231,000
Interest Expenses= 492,000
Amortization= 0
EBITDA= 1,231,000+ 492,000+0
EBITDA = $1,723,000.
Thus,
Price/EBITDA per Share= 27.2 / (1,723,000 / 535,000,001)
Price/EBITDA per Share=27.2/0.0032
Price/EBITDA per Share =8500
Bancorp Bank
EBIT= 8,305,000
Interest Expenses= 1,676,000
EBITDA= 8,305,000+ 1,676,000+0
EBITDA= 10,081,000
Price/EBITDA per Share
Price/EBITDA per Share =34.03 / (10,081,000 / 1.86 Billion)
Price/EBITDA per Share =34.03/0.0054
Price/EBITDA per Share =6301
Current Market Value of Sun Trust Bank and Bancorp Bank
The next step is to provide the breakdown of the valuation of Sun Trust Bank and Bancorp Bank. The report calculates the valuation of the two companies by taking into account the entire liquid assets, exotic instruments and outstanding debts that the two companies record in their balance sheets.
The following formula is used to determine the values of Sun Trust Bank and Bancorp Bank.
Enterprise Value= Market Capitalization + Debt-Cash
Value of Sun Trust Bank =$16.09.58 Billion
Value of Bancorp Bank = $107 .94 Billion.
Findings
The findings of the report reveal that Bancorp Bank has more value than the Sun Trust Bank. Typically, Sun Trust Bank is rated below average when compared to the related companies. It is revealed that the overall value of the Money Center Banks industry in the United States is $2.79 Trillion. With the current value of the Sun Trust Bank, the company is just contributing less than 1% to all equities in Money Center Banks industry. Moreover, the company current valuation is 49.09% lower than the financial sector and 95.42% lower than Money Center Banks industry. (Yahoo Finance, 2013).
Contrarily, U.S. Bancorp is rated second with reference to valuation among the related companies. The total market size of the Regional-Midwest Banks industry that Bancorp Bank is operating is $266.21 and the current valuation of U.S. Bancorp is $107.94 revealing that the U.S. Bancorp is contributing to 41% of the equities listed under Regional – Midwest Banks industry. Unlike Sun Trust Bank, the current valuation of the U.S. Bancorp is 241.51% higher than the financial sector and 97.15% higher than the Regional-Midwest Bank Industry.
Valuation
Sun Trust Bank
US Bancorp
Industry Average
Price-to-Book Value
0.74
1.63
1
Price/Earnings per Share
9.25
11.94
13.8
Price/EBITDA per Share
Value
$16.09.58 Billion
$107 .94 Billion.
Recommendation
The report recommends that the U.S. Bancorp is the only bank from the two banks that is desirable for the acquisition. Analysis of the financial positions of the U.S. Bancorp reveals the company has a very strong financial record. Price-to-Book Value of the U.S. Bancorp is 1.63 and its current valuation is 241.51%, which is higher than valuation of the financial sector, and 97.15% higher than the Regional-Midwest Bank Industry. On the other hand, Sun Trust Bank is in bad financial positions. Presently, the Sun Trust Bank has a low book value (0.74) and in theory, a company with a low book value of less than one may go bankrupt any time. Based on the findings, Mr. Moovon should bid the U.S. Bancorp for $104 billion.
References
Yahoo Finance. (2013). Sun Trust Bank. (STI). Yahoo Finance Inc.
Yahoo Finance. (2013). U.S. Bancorp (USB) -NYSE. Yahoo Finance Inc.
