Can investors bank on the two big boys' stock?

• Author: Davis, Lisa
• Position: NationsBank Corp.; First Union

Give NationsBank and First Union credit for blowing by most of their Southeastern brethren in asset growth and expansion into other businesses. Praise them for building powerhouse franchises. But don't expect any of that to impress investors.

"They've almost consistently been at the lowest level of the top banks in the United States in terms of price/earnings multiple," says Richard Bove, an analyst with Raymond James & Associates in St. Petersburg, Fla.

Last year's bank-stock boom boosted NationsBank's shares 54% and First Union's 34%, and they've hit record highs this year. But they still haven't quite caught up. At the end of February, NationsBank (NB-NYSE) traded at 9.4 times projected 1996 earnings and First Union (FTU-NYSE) at 9.7, while their regional peers averaged closer to 11.

Are shares in the Charlotte-based megabanks undervalued? Analysts are divided. Some investors bailed out of bank stocks March 8 when strong employment numbers raised the prospect of higher interest rates. Investors are concerned this year about slowing loan growth and deteriorating credit quality. "Everyone is trying to gauge who is going to come through the next credit cycle in good shape," notes analyst Dennis Shea of Morgan Stanley & Co. in New York.

He doesn't foresee a sharp downturn. "The biggest question is consumer losses in the credit-card area. That's why you'll see a much higher [loan-loss] provision, for example, at First Union in 1996," which has rapidly expanded its credit-card business.

Still, NationsBank and First Union benefit from strong market share in the thriving Southeast, says Sally Pope Davis, an analyst with Goldman Sachs in New York. "Both companies are well-managed, and both are growing."

What many investors fear is that they focus on growth over profitability. NationsBank's name has been linked with everybody from BankAmerica to Mellon Bank under the assumption that CEO Hugh McColl wants a big merger, which could dilute earnings substantially.

First Union has already done it. Last year, it acquired New Jersey-based First Fidelity Bancorp for $5.4 billion, a pricey 1.92 times book value. The merger extends its franchise up the East Coast to Connecticut, increasing its customer base to 11 million. First Union's aim is to jump-start First Fidelity's stalled revenue growth by offering its greater array of products.

"It doesn't make sense to pay someone a premium if you are bringing the value to the table," says analyst Moshe Orenbuch...