While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of SunTrust Banks (STI) slipped nearly 1% in pre-market trading Tuesday after Evercore Partners downgraded the bank holding company from overweight to equal weight.
So what: Along with the downgrade, analyst John Pancari reiterated his price target of $40, representing just 2% worth of upside to yesterday's close. So while momentum traders might be attracted to SunTrust's price strength over the past year, Pancari's call could reflect a sense on Wall Street that the risks surrounding the company's net interest margin, or NIM, are being largely overlooked.
Now what: According to Evercore, SunTrust's risk/reward trade-off is particularly unappealing at this point. "STI reported a mixed 2Q marked by stronger loan growth, lower LLP, and better expenses, but also a weaker NIM," said Pancari. "Bottom line: While we are encouraged by STI's strengthening loan growth and well-contained expenses, EPS growth is limited by prevailing NIM headwinds. Such pressure results in a downside revision to our already conservative NIM outlook, and poses risk to Street EPS ests." When you couple that downbeat view with SunTrust's industry-topping P/E of 16, it's tough to disagree with Evercore's cautious stance.
