Tuesday, FBR Capital Markets upgraded Zions Bancorp. (ZION) shares to Outperform from Market Perform and increased its price target to $20 from $17. The brokerage widened its 2009 GAAP loss per share estimate to $10.60 from $10.25, and its 2010 loss estimate to $2.30 from $2.10.
Analyst David Rochester attributed the upgrade based on new risk-adjusted bank valuation framework. The analyst's more favorable outlook on the stock is primarily driven by his new proprietary risk-adjusted valuation model, which he uses as a tool to evaluate opportunities for achieving relative outperformance in the bank space.
Despite the analyst's expectation of a noisy second half of 2009 due to continued credit deterioration, which could pressure near-term consensus estimates, he expects ZION to return to profitability in fiscal 2011, the expectation of which could continue to support the valuation at current levels and drive shares higher over the next year.
Longer term, the analyst expects material upside is possible as earnings power converges with his new "normalized" EPS expectation in the $2.70-$3.30 range. The analyst has gained incrementally more comfort with the company's near-term capital and liquidity positions following its recently announced "at the market" common equity raise of $250 million and the $450 million debt issuance.
While some investors may believe more capital is needed in an adverse economic scenario, the analyst's sub-by-sub burndown analysis indicates that any additional capital requirements in a double-dip scenario would not be material enough to alter his longer-term view on share outperformance.
Currently, ZION is up $0.28 or 1.54% and trading at $18.47.
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