Time to Buy Fifth Third Shares, Says BAC Merrill

NEW YORK (TheStreet) -- shares of Fifth Third Bancorp (FITB) are in a "sweet spot," according to Bank of America Merrill Lynch analyst Erika Najarian, who also sees the stock as a good defensive play.

For bank stock investors, 2014 so far has brought a change of tone, with the KBW Bank Index (I:BKX) pulling back 5%, following a 35% gain in 2013 and a 30% gain during 2012.

Najarian on Thursday upgraded Fifth Third to a "buy" rating, while raising her price target for the shares to $24 from $23. The new target represents 12-month upside potential of 16% from Wednesday's closing price of $20.65.

Fifth Third's shares trade for 10.8 times the consensus 2015 earnings estimate of $1.91 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.77. Najarian is out in front of the consensus, estimating Fifth Third will earn $1.85 a share this year, with EPS growing to $2.05 in 2015 and $2.40 in 2016.

"FITB trades at a 1x discount to large regional peers on P/E, despite our outlook for the company to outpace these same peers in EPS growth in '14 and '15," Najarian wrote in a note to clients Thursday.

"Additionally, investor feedback suggests a strong propensity to own banks, but recent stock action suggests reduced risk appetite... Moreover, in a market mostly fueled by multiple expansion, we believe investors will be particularly receptive to EPS upgrade stories like FITB," Najarian added.

Fourth-quarter earnings season continued the trend seen for large-cap U.S. banks over the previous two quarters, including a large decline in mortgage origination volume, as rising long-term interest rates curtailed refinance applications. Fifth Third's fourth-quarter earnings were moderately from a year earlier, although its earnings for all of 2013 rose considerably from 2012.

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