Investors' anxiety about First Union Corp.'s recent acquisition is unwarranted, according to an SBC Warburg Dillon Read Inc. analyst.

In a recent report, bank analyst Anthony R. Davis said that investors have become skittish about First Union because they fear its recent deal for CoreStates Financial Corp. will dilute its stock.

"Investors are misreading the earnings effect of the deal," argued Mr. Davis, who reiterated his "buy" rating on the company Jan. 12. "They should evaluate the company's last three deals instead of focusing on just this last one. By doing that they are fighting yesterday's war."

Shares of the Charlotte, N.C., superregional banking company certainly appear to be battle-weary. Since its high of $52.875 in October, the stock has slid 7.3%. To be sure, some of that decline reflects the battering all financial stocks have taken due to turmoil in Southeast Asia.

But investors often grow wary of aggressive acquirers-and that view appears to have further dampened interest in First Union.

"The stock of companies that are viewed to be acquirers suffers a little bit more because of the dilutive factor in their earnings," said Scott Edgar, bank analyst at the Sife Fund, which owns 250,000 shares of First Union. "We own First Union because it is a good core bank, but it is not on our top 10 list. While the fundamentals are good, there are others which are not acquiring that have fundamentals that are more compelling."

Bank analyst Thomas K. Brown of Donaldson, Lufkin & Jenrette fueled that sentiment in early December by tagging First Union as a "serial dilutor" in a searing 20-page report.

"The stock is not truly cheap," wrote Mr. Brown. "And don't own it."

In response, Mr. Davis dashed off a 30-page rebuttal titled "Unjustly Accused," which urged investors to "keep buying" because "First Union is one of the cheapest bank stocks around."

Mr. Davis acknowledged that First Union's earnings per share growth has slightly lagged the average 12.3% rate reported by the largest banking companies since 1993.

But First Union outshines many superregionals in other fundamentals, such as net chargeoffs as a percentage of average loans, dividend growth, and return on equity, he said.

Still, First Union shareholders believe that management has placed the pursuit of acquisitions above the interest of stockholders, said Mr. Davis.

"The message is clearly suggested by the precipitous drop in First Union's price-to-earnings ratio relative to the top 25 banks between 1988- 1992," wrote Mr. Davis. "During that period, the bank did complete approximately 20 in-market bank acquisitions, which were cumulatively dilutive by roughly 20%."

First Union's recent acquisitions, however, are only minimally dilutive, argued Mr. Davis.

According to his calculations, First Union's three acquisitions announced last year-Wheat First Butcher Singer Inc., Signet Banking Corp., and CoreStates-have only diluted First Union's stock by 1 cent per share.

In fact, the cost savings First Union is expected to realize in 1998 from these recent deals should boost earnings per share by 17.5%, as opposed to 12.3% had it acquired no companies, said Mr. Davis.

He also pointed out that the company has an "appetite for additional bank acquisitions," which would likely be in New England.

He named Fleet Financial Inc. as a potential target.

If the company were to acquire Fleet, dilution for 1999 would be 5 cents per share, Mr. Davis said.

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