Stocks: NationsBank Gets Reluctant Downgrade After Stock Rebounds

Less than a week after putting a "trading buy" on NationsBank Corp., Brown Brothers, Harriman & Co. analyst Nancy A. Bush Tuesday returned the stock to a neutral rating.

The revised rating comes as shares bounced back from last week's slide following NationsBank's announcement of a deal to buy Bank South Corp. at a sweet premium.

"It was amazing," said Ms. Bush. "Last week everyone hated that deal, and the next day the stock woke up and marched on."

After regaining 5.5% of its value in four days, the stock is again in the vicinity of the analyst's price target of $63 to $64. It rose 12.5 cents to $64.375 in trading Tuesday.

The speed at which the stock rebounded and the rapidness of the rating change surprised Ms. Bush. "In my experience with trading recommendations and with NationsBank, it's pretty unprecedented," she said.

Analysts generally attributed the rise in the stock to upwardly revised earnings estimates from NationsBank.

"Analysts are simply moving up the estimates to reflect the fact that NationsBank has a lot of swaps and maturities in the securities portfolio, and the capital markets business is good," said Paul Sowell, a stock analyst at S.G. Warburg & Co.

While Ms. Bush says she sees some psychological momentum from the recent gains in the stock, she expressed concerns about the sector as a whole.

Rates on long-term bonds could move back up 75 to 100 basis points, she said. "I'm just not willing to play for any great length of time right now in any new names," she said. "Our firm's view on the bond market is not at all sanguine right now." A sharp break in the bond market would give the sector a bit of a "whacking."

Nonetheless, some of the "cheap" stocks, like NationsBank, Fleet, and Keycorp have shown momentum in the last few days.

"The laggard stocks and the cheap stocks are beginning to do a bit of a catching up," said Ms. Bush.

Typical of the ambivalence many analysts show the Charlotte, N.C.-based bank, Ms. Bush said she saw momentum in the stock, even as she removed the "trading buy."

"We caution holders of NationsBank who might want to start taking profits here that we believe there's still a bit to go in the stock and that only partial positions should be cashed in at this point," she said.

She said it wouldn't be much of a stretch for the stock to trade at 9.5 to 10 times earnings, which could raise the stock price to the mid to high $60s, and perhaps even $70, she said.

"If the average multiple is 11, I don't think it'd be out of the question for NationsBank to go for 9.5 to 10 times earnings, which would still be a discount to the group," she said.

Ms. Bush said NationsBank still gets high marks for being a pretty disciplined acquirer during this latest merger frenzy.

The announced acquisition of Summit Bancorp by UJB Financial Corp. for 2.4 times book value casts a new light on the Bank South acquisition, said Ms. Bush.

"The Bank South pricing does not look so onerous in the wake of the UJB- Summit deal," she said.

Other analysts said they saw much greater upside potential with NationsBank's stock, but thought the comparison of the two deals did not make much sense.

"You can't really make that argument," said Moshe Orenbuch, a stock analyst at Sanford C. Bernstein & Co., citing the relative market capitalization of the acquired and the acquirers in the two deals.

Summit is a full 35% of the size of UJB, while Bank South is only 4% of the market capitalization of NationsBank.

"Whether they are comparable size or not, a pricing goal or pricing level tends to be looked at by the next deal maker," Ms. Bush said. "The precedent becomes the last deal."

Analysts agreed the market is generally taking another look at NationsBank.

"Everybody's got an impression of NationsBank," said Mr. Orenbuch. "Many are not favorable, but that's been changing as people take another look at it."

Separately, S.G. Warburg said it increased its earnings estimates on Wells Fargo and Co. to $15.05 per share from $14.35 for 1995, and to $15.75 from $15.25 for 1996, but maintained its hold rating on the stock.

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