Goldman just put FHN on its conviction BUY list-7-23-08 ----------------------------------- First Horizon: A Great Example of Undervaluation To see the mismatch between a company's valuation and the outlook for its underlying business, let's look at one bank that's been a favorite of the shorts: First Horizon. The company's stock has been battered over worries regarding its mortgage subsidiary and its large home equity and residential construction loan portfolios. Over the last year First Horizon has fallen from $35 to as low as $4.50 last Monday. As I mentioned, the company last week moved up its earnings release because of the pounding the stock took on the 14th. It reported a second quarter loss of 11 cents per share. Beneath the headline number, though, underlying trends in credit quality were encouraging, which made us increasingly comfortable with management's worst-case loss estimates. In a nutshell, here's why buying First Horizon at the current $8.25 stock price looks like a great investment opportunity to us. Credit is stabilizing. Capital has already been raised and cash dividend eliminated. The stock trades at 66% of its tangible book value per share. The stock trades at 2 times pre-tax, pre-provision earnings. The stock trades at 4 times our estimate of "normalized" earnings per share. I wish I could make this more complicated, but I can't. The stock sells at an extreme valuation, even as signs emerge that its credit issues are manageable. And not only is capital sufficient, we believe it will prove to be excessive. Given all this, it's not hard to see First Horizon's stock price rising into the low 20s over the next 18 months. That's a three-bagger on the upside without survival risk. I like that tradeoff.

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