The share price of First Union Corp. may finally have found the bottom. Despite months of distress - including, most recently, the news that its 2000 earnings would be lower than expected - the stock showed relative strength Thursday.
In early trading the Charlotte, N.C., banking company's shares were up a tad, even when just about all other banks were down. Later in the day the stock price declined, but the percentage drop was only half that of the 30 institutions in the Standard & Poor's bank index. At the close, the stock was unchanged, and the American Banker index of the nation's 50 largest banks was down 2.1%.
The stock's show of strength was especially unusual because stories this week, first in American Banker and then in The Wall Street Journal, reported that $235 billion-asset First Union was encouraging analysts to reduce their earnings projections for 2000.
Announcements of exactly this kind have previously sent the stock plummeting. Twice, in January and May First Union said it would not hit analysts' earnings targets. Each time the stock price fell more than 8%.
"All the bad news already is in the stock," said Adam J. Lewis, senior vice president and bank stock trader at Keefe, Bruyette & Woods Inc. "Most investors had given up on the stock," but at some point, perhaps now, Mr. Lewis said, "the stock will be so low that value players come in."
Merrill Lynch & Co. was among those that took a more favorable view of the company. Merrill analyst Sandra Flannigan said the company's guidance created "a much clearer vision" about its future." Despite the lower earnings outlook - she revised her 2000 earnings estimate down 15 cents to $3.60 - Ms. Flannigan maintained her "long-term buy" rating.
In addition, despite more moderate 2000 earnings per share growth expectations, the market will be somewhat relieved that management is being more up-front with the investment community, Ms. Flannigan said.
Not all analysts agreed that First Union may have hit its nadir. The performance of the stock in Thursday's market does not mean that "things have stabilized," said Marni Pont O'Doherty, an analyst with Keefe, Bruyette. She cut her 2000 estimates to $3.50, from $3.65. "The question is when revenue will rebound. That is what I want to see, revenue growth and earnings growth. My model shows that I am going to get a little bit of both."
And longtime bank bear Michael Mayo, an analyst at Credit Suisse First Boston, continues to have a negative view. "The same problems that hurt the company this year will hurt the company next year," he said.
First Union shares have fallen nearly 44% since the beginning of the year. It has one of the lowest price/earnings ratios - 9.5 times 2000 earnings - of the 24 banks that make up the Keefe Bruyette's bank index.
Starting about two or three weeks ago, First Union guided downward 2000 estimates when analysts called the company. The calls reached flood proportions Tuesday, after the board met.
First Union said its costs would rise in part because of higher expenses associated with, among other things, a plan to hire more tellers.
First Union lost many customers and branch employees this year when it had trouble integrating Philadelphia's CoreStates Financial Corp., which it bought in 1998. It laid off thousands of employees in trying to improve the new unit's profitability. But the plan backfired, driving away large numbers of customers.
Now some analysts see reasons for the stock to rise.
"The company's stock has massively underperformed," said James Ellman, an analyst at Merrill Lynch Asset Management. But First Union "still has a good franchise, and another company may want to buy it," he said. "The momentum investors are long gone, the growth investors are also gone. So the value investors have started to come out of the woodwork."
Investors also are attracted to the 5.52% yield on First Union's stock, which is the highest of the 24 banking companies in the Keefe Bruyette index, said Ms. Pont O'Doherty. Bank One Corp. follows, with a yield of 5.39%.First Union spokeswoman Mary Eshet said, "The market recognizes that we have the right strategy in place, we are making smart investments in the future, and that our outlook for revenue growth is good."
