Time to Buy BB&T After Rough 2013 Headlines: Oppenheimer

NEW YORK ( TheStreet) -- BB&T ( BBT) has suffered through some pretty rough headlines during 2013, setting up the bank's stock for outperformance over the next year and a half, according to Oppenheimer analyst Terry McEvoy.

The analyst late on Monday upgraded BB&T to an "outperform" rating, with a 12-to-18-month price target of $40, implying 19% upside over Monday's closing price of $33.75. "We expect normalcy will return again in Winston Salem and believe the underperformance at BB&T has run its course," McEvoy wrote in a note to clients.

What's so abnormal about BB&T? For starters, the bank's initial 2013 capital plan was rejected by the Federal Reserve on March 14, based on the regulator's "qualitative" assessment. The Fed noted that BB&T on March 4 had "disclosed publicly that it had reevaluated its process related to calculating risk-weighted assets and determined that certain adjustments, primarily related to the presentation of certain unfunded lending commitments, were required in order to conform to regulatory guidance."

BB&T's revised capital plan was approved by the Federal in August, but the revised plan included no dividend increase or stock buybacks through the first quarter of 2014. In a statement discussing the new capital plan, BB&T CEO Kelly King said, "We are pleased to have one of the highest dividend payout percentages and dividend yields of any of the top financial institutions in the country," adding that "we approached the resubmission conservatively and did not request a further increase in capital deployment at this time."

BB&T pays a quarterly dividend of 23 cents a share, for a dividend yield of 2.73%, based on Monday's closing price.

The most recent negative headline for BB&T was a ruling against the bank in September by the U.S. Court of Federal Claims, disallowing tax deductions and foreign tax credits taken in 2012.

"Based on the court's decision and an evaluation of other tax-related matters, we expect to record an after-tax charge of approximately $250 million this quarter," King said in a statement on Sept. 20.

"Shares of BB&T have lagged its regional bank peers by 790bps year-to-date with its stock up 15.9% versus an average of 23.8% for ten comparable regional banks," McEvoy wrote. The 10 peers are all among the 24 components of the KBW Bank Index ( I:BKX), which was up 24% this year through Monday's close at 62.25.

The analyst also sees BB&T as "attractively valued," with the shares trading for 1.1 times his 2014 earnings estimate of $3.05 a share. The consensus 2014 EPS estimate among analysts polled by Thomson Reuters is $3.08.

Looking ahead, McEvoy sees plenty of growth for BB&T beyond its traditional footprint in the Southeast. "BB&T should have 60 branches open in Texas soon and has been adding bankers in larger metropolitan markets such as Chicago and San Francisco," he wrote.

Following the next round of Federal Reserve stress tests, the analyst expects BB&T to announce significant plans for capital deployment, which he expects to take the form of share buybacks because the company is already paying out roughly 30% of its earnings in dividends.

"We are currently modeling $770M of buyback in 2014, which equates to approximately 35% of our FY14 net income estimate," he wrote.

BBT Chart BBT data by YCharts

Interested in more on BB&T? See TheStreet Ratings' report card for this stock.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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