Shares of National City Corp. have soared in recent weeks, but the stock is not likely to maintain its altitude, one analyst says.
Michael L. Mayo of Credit Suisse First Boston told clients Tuesday that the company's stock is overvalued and its long-term earnings outlook mediocre compared with its peers'.
The recent performance of National City's stock suggests that it will outperform the typical bank, but its long-term outlook is "fuzzy," Mr. Mayo said. He downgraded the stock of the Cleveland-based bank to "hold" from "buy."
It closed Tuesday at $66.6875, off 81.25 cents, on news of the downgrade.
The stock has enjoyed a strong run since it announced Oct. 27 that it would buy $2.7 billion of its own shares. The stock had gained almost 7% since the announcement. Also fueling the stock is the smooth integration of its recent acquisition of First of America Corp., Kalamazoo, Mich., and the end of the GM strike. The strike dampened third-quarter earnings for many midwestern companies.
Catherine Murray at J.P. Morgan Securities Inc., called National City a good stock to buy, particularly in contrast to banks that have suffered because of their exposures to hedge funds and tumultuous foreign markets. "It is a good, solid company with a low-risk profile that is committed to using capital efficiently," said the analyst, who has had a "buy" rating on the company since March.
Mr. Mayo, however, argued that National City lacks a clearly defined niche strategy and has lagged others in technology and product development. National City "does not have the franchise to compete in the big leagues," he said.
The company needs to make an acquisition, but is caught in a Catch-22, the analyst said. The company is under no pressure to make one, but if it does not, it will have more difficulty competing, argued Mr. Mayo.
And the longer National City waits to make a deal, the riskier it becomes because in 1999 the company will have to focus on making its systems year-2000 compliant, said Mr. Mayo.
A better investment is PNC Bank Corp., Mr. Mayo said. The Pittsburgh company has a strong franchise and needs to take action to improve shareholder return, said Mr. Mayo. "The mere threat of that can be a positive catalyst for the stock."
Meanwhile, banks stocks are losing steam as investors grow jittery about the sector's lofty stock prices and less confident about another interest rate cut.
Investors have loaded up on bank stocks in anticipation of the Federal Reserve easing interest rates for a third time at its policymaking meeting Tuesday.
The Fed cut interest rates in September and again in October, prompting a spate of buying, which buoyed some bank stocks near or to 52-week highs.
However, Federal Chairman Alan Greenspan cooled investors' expectations last week when he suggested during a speech at the Securities Industry Association in Florida that the Federal Reserve is not likely to ease interest rates at its next meeting.