SunTrust Banks, Inc. (STI), First Horizon National Corporation (FHN), Alcatel Lucent SA (ADR) (ALU): Thursday’s Top Upgrades (and Downgrades)

But I think that’s bunk; 15 times forward earnings is way too much to pay for a stock that most analysts agree will struggle to produce even 8% annualized profits growth over the next five years. Meanwhile, the number that 8% growth rate should be compared to — actual, historical trailing earnings, is low enough to give the company a trailing P/E ratio of more than 18. Which is, of course, also too high.

Long story short, Compass Point may be right that investors will eventually pay more for First Horizon National Corporation (NYSE:FHN), and accord it a valuation multiple closer to those of its peers. But they’d be wrong to. At this valuation, and at this growth rate, First Horizon National Corporation (NYSE:FHN) is overpriced already.

Sunnier outlook for SunTrust
On the other hand, Compass Point also likes SunTrust Banks, Inc. (NYSE:STI), and gave that one a buy rating as well today — and here, I think the analyst strikes closer to the mark. Priced at just 8.5 times earnings, paying a modest 1.2% dividend yield, and pegged for 10% annualized long-term profits growth by most analysts on Wall Street, SunTrust Banks, Inc. (NYSE:STI) shares look pretty substantially undervalued.

Compass Point thinks concerns over the company’s mortgage banking business explain the depressed valuation at SunTrust Banks, Inc. (NYSE:STI), but argues the concerns “are already priced into the stock,” and create an opportunity to profit in the event of “a pickup in [commercial real estate] and residential lending.”

I agree, and in fact, I’d even go a bit further than the analyst, here. Compass Point’s projection of a $38 stock price a year from now suggests there’s at least 14% profit in the shares. But if you add SunTrust Banks, Inc. (NYSE:STI)’s dividend yield to its projected growth rate, the total return ratio on this stock with a P/E of 8.5 is only about 0.76 — suggesting the stock could in fact rise in price by nearly a third and still be only fairly valued.

Of the two banks Compass Point recommends today, I think SunTrust is clearly the better bargain.

The article Thursday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no positions in any stock mentioned.

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