Dow Financials Could Rise 20% Over Year
NEW YORK (TheStreet) -- Financial stocks in the Dow Jones Industrial Average -- JPMorgan Chase (JPM) - Get Report, American Express (AXP) - Get Report and Bank of America (BAC) - Get Report -- have rebounded from dismal levels a year ago, and analysts expect them to rise more than 20% during the next year.
Analysts polled by
Bloomberg
expect American Express shares to gain 21%, Bank of America's to rise 45% and JPMorgan's to jump 35%. American Express and Bank of America stock has doubled in the past year, while JPMorgan's has soared 55%.
More than a year after the credit crisis almost brought down the financial services industry, shares of some of its biggest players look like attractive long-term bets. Even though President Barack Obama wants to tax banks to cover bailout costs and restrict proprietary trading and other businesses, investors will likely still gain.
JPMorgan:
The company beat analysts' estimates when it reported fourth-quarter earnings of $3.3 billion, or 74 cents a share. However, a loss of $1.4 billion in its consumer lending unit placed a significant drag on earnings. The company had a return on equity of 6% last year.
While this would be considered mediocre performance in a non-crisis environment, it's not too shabby considering the economy and JPMorgan's consumer loan exposure. Net credit card charge-offs totaled $3.9 billion during the fourth quarter for an annualized rate of 9.3%, up from 5.6% a year earlier but down from 10.3% in the third quarter. The company's near-term results in this area are likely to move in-line with unemployment.
We rate the company "buy." Citigroup analyst Keith Horowitz recently upgraded the stock to "buy," saying the shares could rise to as much as $70 from Friday's closing price of $39 during the next two years. The shares trade for less than eight times Horowitz's normalized earnings estimate of $5.15 for 2011. While a 2011 projection isn't available yet, the average forward price-to-earnings ratio of the Dow Jones U.S. Financials Index for 2010 is 15, according to Bloomberg.
Bank of America:
The nation's largest bank lost $5.2 billion or 60 cents a share for the fourth quarter, which included the $4 billion it repaid the government for aid it received from the Troubled Asset Relief Program. Excluding the TARP costs, the fourth-quarter net loss was $194 million, compared with a year-earlier loss of $2.4 billion.
Besides the TARP costs, the big drag on the company's earnings over the past year has been provisions for loan loss reserves, which totaled $10.1 billion in the fourth quarter and $48.6 billion for 2009.
There were some bright signs for loan quality, as net loan charge-offs declined to $8.4 billion in the fourth quarter from $9.6 billion in the third quarter. The annualized ratio of net charge-offs to average loans in the fourth quarter was 3.7%, and loan loss reserves covered 4.2% of total loans as of Dec. 31. This was the first quarter-over-quarter decline in charge-offs in four years, which reflects improved consumer loan quality.
We recently upgraded Bank of America to "hold" from "sell," with the previous rating factoring in price volatility, the lowering of the quarterly dividend to a penny a share, and several years of substandard total returns even before the credit crisis.
Based on estimates from Sandler O'Neill analyst Jeff Harte, who rates the stock "buy," the shares are trading at 15 times its 2010 estimated earnings of $1. Based on Sandler O'Neill's $2.55 estimate for normalized earnings, the stock would be selling for less than six times earnings.
As Bank of America's loan quality improves and charge-offs decline, the stock could be a strong bet for investors willing to make a two- or three-year commitment. This year, the company will be positioned to benefit from its 2009 acquisition of Merrill Lynch.
American Express:
The credit-card company also improved its loan quality during the fourth quarter. The company's fourth-quarter net income tripled to $716 million, or 60 cents, from a year earlier, beating the average estimate.
The company's return on average common equity for 2009 was 13.6%, down from 22.1%, but considering the crisis environment and the company's consumer focus, 2009 was an impressive year for American Express.
Total credit card write-offs on a managed basis during the fourth quarter were $1.1 billion or 7.3% of average loans, down from $1.3 billion or 8.6% in the third quarter. An important sign of credit quality improvement is that managed card delinquencies were 3.6% as of Dec. 31, down from 4.6% a year earlier.
The shares are trading at 16 times annualized fourth-quarter earnings, but only 11 times the $3.30 a share Bank of America Merrill Lynch analyst Kenneth Bruce estimates the company will earn in 2011. Bruce has a "neutral" rating on the shares and a 12-month price target of $44.
That projection isn't very exciting. But when you consider that American Express shares were selling for 18 to 22 times earnings between 2006 and 2008, the shares have the potential to hit $60 within the next two or three years.
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Reported by Philip van Doorn in Jupiter Fla.
Philip W. van Doorn joined TheStreet.com Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.