Every time a company restates earnings because of an accounting error, my mind rolls back to my sleepless days and nights following WorldCom. It is the ultimate slap in the face to investors and Wall Street analysts to have a company tell you that its numbers were incorrect.
The problem allegedly stemmed from "input data errors" used to calculate the allowances for loan losses, primarily in SunTrust's auto loan portfolio in the first two quarters of 2004. The company's third-quarter earnings, which were to be announced on Tuesday, are also going to be reviewed again before being released later. SunTrust also gave a few of its key officers a paid vacation, neatly described as "administrative leave," while its audit committee has a chance to further review their department's mistakes.
The company and many of its fellow financial institutions, such as Wachovia
The apparent overstatement of loan loss reserves is easily correctible and should have a more positive impact on the company and its shares (once the shock of the restatement headlines wears off). SunTrust's CEO, Philip Humann, has reacted quickly and decisively to preserve the company's "reputation for integrity and financial stewardship."
Accounting mistakes aside, SunTrust shares appear to be fairly valued at 13 times the 2005 earnings estimate of $5.52 per share; this lofty multiple represents a significant premium to the company's high single-digit earnings growth rate, which is balanced by its extremely attractive 2.87% dividend yield.
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Fool contributor Phil Wohl spent more than 12 years on Wall Street and is still a bit disturbed by WorldCom's deceit. He does not own shares of any of the companies mentioned.