Firstar Downgraded; Profit Picture Seen Less Bright

Salomon Brothers Inc. downgraded Firstar Corp. on Monday, saying the company's fast-rising stock price was higher than performance warranted.

Analyst Michael A. Plodwick cut Firstar to "hold" from "buy" and slashed his 1997 earnings estimate to $2, from $2.10, and his 1998 estimate to $2.20, from $2.40.

"The earnings picture is not as bright for Firstar as when we recommended it in the first week of January," said Mr. Plodwick. "The stock price is fairly valued given the fundamental outlook."

He pointed out that shares of the $19.8 billion-asset bank appreciated 10% last week and hit its 52-week high of $37.062 on Friday. This year the stock is up 41%, versus the 36% year-to-date return of Salomon Brothers' 50-bank model, he said.

Firstar shares fell 43.7 cents, to $36.625, on a day when bank stocks surged.

For the past three quarters, Firstar has failed to match analysts' earnings estimates. The company's restructuring program, "Firstar Forward," which was created to help the bank strengthen its efficiency ratio, has proved disappointing.

"Results of their restructuring program were supposed to be evident in the second half of the year. Now they're saying it won't be evident until the first quarter or second quarter of next year," Mr. Plodwick said.

Mr. Plodwick joined the growing ranks of analysts who say the company's best future is as a merger target.

Donaldson, Lufkin Jenrette Inc. and Friedman, Billings Ramsey & Co. downgraded the company in August, citing similar problems.

"We don't recommend stocks solely on takeover value, but the longer there are earnings difficulties, the odds go up that they could be acquired," said Mr. Plodwick.

Potential acquirers include First Chicago NBD Corp., Banc One Corp., Norwest Inc., U.S. Bancorp, National City Corp., ABN Amro NV, and National Bank of Australia, he said.

Others on Wall Street agree that it is just a matter of time before the bank is taken out.

ABN Amro Chicago Corp. analyst James Schutz - who has a "buy" on Firstar-acknowledged its difficulties but said that "a number of buyers would be interested in the company because it has a premiere franchise."

Mr. Schutz pointed out that Firstar has a fairly sizable market share in the Midwest and a strong asset management group with "an outstanding reputation."

The analyst estimated that investors could earn a premium of 20% to 25% in a sale.

Analyst Katrina Blecher of Gruntal & Co. also believes that Firstar is ripe for plucking, particularly by U.S. Bancorp.

"Acquisitions happen in spurts," said Ms. Blecher. "Banc One is still busy digesting First USA; U.S. Bancorp's last acquisition was long enough ago that (it is) probably looking again."

However, some critics are so weary of the company's lackluster performance that they believe returns would be marginal if it were acquired.

Firstar "cut too much too fast, so that it has hurt fundamentally," said one source, who asked not to be identified.

The Milwaukee bank is "trading at a premium," the source said. "This company is not like Barnett Banks Inc.; there is no hidden gem in Firstar. If they were to be taken out, the upside is maybe 10%. It's not worth it."

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