Shares of CoreStates Financial Corp. won an "outperform" rating from Smith Barney Inc. Monday, based on the prospect of better earnings performance during the next five years.
Currently, the Philadelphia banking company's stock trades at a discount to many other major regional banks on a price-to-earnings basis, said analyst Henry
C. Dickson.
"We believe this is because of the lack of consistent earnings growth since 1989, tied to dilution from acquisitions and concerns about future earnings disappointments from acquisitions," he said.
But CoreStates' attractive business mix and strong position in its populous Middle Atlantic market area, coupled with its recent management reorganization, "help offset these concerns," he said.
Smith Barney also recently listed CoreStates as one of its top 10 likely acquisition targets in the fast-approaching era of unlimited interstate banking.
In Tuesday's market, CoreStates' stock price was unchanged, at $27.625 per share. The analyst's 12-month price target for the stock is $33.
Mr. Dickson also opened coverage of Meridian Bancorp., Reading, Pa., with a "neutral" rating. The analyst said his new CoreStates rating, which is one level below a "buy" recommendation, is based on several main factors.
He anticipates that a recent management reshuffling will produce "a price-disciplined approach" to future acquisitions. As a result, he said, both earnings and book value should grow more rapidly over the next five years than they have since the acquisition of First Pennsylvania Corp. five years ago.
"The acquisitions of First Pennsylvania, Constellation [Bancorp., Elizabeth, N.J.] and Independence [Bancorp, Perkasie, Pa.] have somewhat hidden the basically good levels of performance at CoreStates," Mr. Dickson said. Dilution involved in those deals has stymied growth in book value since 1989.
Mr. Dickson forecasts that CoreStates will earn $3 per share this year and $3.45 next year, implying a 1995 return on assets of better than 1.50% and a return on equity of more than 17%.
Based on expected 1995 earnings, the stock trades at only 94% of Smith Barney's regional bank composite, while its dividend yield of 4.2% was 120% of the composite.
Regarding Meridian, Mr. Dickson said its shares are fairly valued on a fundamental basis and that the current price includes an acquisition premium. Meridian's shares were unchanged Tuesday, at $31.625.
"Still, we believe Meridian's stock has limited downside and that it is an attractive investment vehicle for investors looking to construct a basket of 'consolidation candidates'," he said.
He also thinks Meridian, which has a "checkered earnings history," will report "more consistent" earnings growth through 1995. He forecast $3 per share this year and $3.40 next year.
"On an originally reported basis," he said, "Meridian showed steady earnings growth from 1983 through 1986." But from 1986 to 1990 it was below its 1986 level "due to problems with various businesses and the dilutive acquisition of Delaware Trust Co."
Earnings returned to the 1986 level by 1991 "and have grown steadily ever since," he said. The company now appears "better focused," he said, adding that it "has the capacity to grow earnings per share at a 10% rate or more through 1995."
The better earnings will be driven by lower expenses, lower credit costs, growth in net interest income, growth in fee income, "and a reduced share count," he said.
Mr. Dickson noted that Meridian's franchise in the Philadelphia market could make it an attractive target. Meridian is the smallest of the five banks that dominate the market but still has a significant presence.
"The attraction of Meridian to the other banking companies," he said, "would be the additional market share gained - especially given its strong position with privately held companies under $50 million in sales, its retail franchise, and trust revenue base" - as well as potential in-market cost savings.
