Wells Fargo's Stability vs. JPMorgan Chase's Upside

NEW YORK ( TheStreet) -- Wells Fargo ( WFC) continually posts stronger earnings, but JPMorgan Chase ( JPM) trades at much lower multiples, so what are investors to think following last week's trading debacle?

More than one analyst has named Wells Fargo as a safe haven amid the fallout from JPMorgan Chase CEO James Dimon's announcement late Thursday of a $2 billion second-quarter trading loss tied the company's hedging activities, and with JPMorgan's shares falling 12% over the past two sessions since the announcement, Wells Fargo has certainly been the safe holding over the short haul, with shares declining only 2% over the same period.

But for long-term investors, both names have plenty of appeal.
JPMorgan Chase CEO James Dimon

Both companies have seen very significant expansion of their domestic banking franchises, though opportunistic acquisitions during the credit crisis.

JPMorgan Chase scooped up the failed Washington Mutual in September 2008, paying the Federal Deposit Insurance Corp. $1.9 billion, while expanding into California, Florida and Washington, and strengthening its branch presence in many other key states. Wells Fargo purchased Wachovia at the end of 2008, after the troubled Charlotte, N.C., lender was pushed by regulators to sell, paying $15.1 billion to double in size, while trumping an earlier bid by Citigroup ( C). Wells Fargo also diversified its revenue stream by greatly expanding its brokerage business through the acquisition of Wachovia Securities.

Wells Fargo has been the stronger and more consistent earning performer according to data supplied by Thomson Reuters Bank Insight, with operating returns on average assets (ROA) ranging from 1.21% to 1.30% over the past five quarters, with returns on average equity (ROE) ranging from 11.51% to 12.02%. Analysts and investors also have an easier time with Wells Fargo than they do with JPMorgan Chase, Citigroup and Bank of America, since those three use debit and credit valuation accounting ( DBA/CVA), which distorts earnings with non-cash items each quarter, while Wells Fargo wisely chose not to follow this path in 2007.

For JPMorgan Chase, with greater earnings volatility because of wide swings in trading revenue, the ROA has ranged between 0.68% and 1.06% over the past five quarters, with ROE ranging from 8.16% to 12.54%.
Wells Fargo CEO John Stumpf

Both companies appear ready to comply with Basel III capital rules years in advance, with Wells Fargo estimating a Basel III Tier 1 common equity ratio of 7.81% as of March 31, while JPMorgan's estimated Basel III ratio as of March 31 was reduced to 8.2% from 8.4%, when the company announced the second-quarter trading loss.

Here's a quick look at stock performance, price ratios and analyst sentiment for both companies:

Wells Fargo's shares closed at $32.41 Monday, returning 19% year-to-date, following a 10% decline during 2011. The shares have pulled back 6% from their year-to-date closing high of $34.51, on April 2.

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Based on a quarterly payout of 22 cents, the shares have a dividend yield of 2.72%.

Wells Fargo repurchased roughly 8 million common shares during the first quarter, and as of March 31 had "remaining authority from its 2011 board of directors authorization to purchase approximately 110 million shares."

The shares trade for just over twice their tangible book value, according to Thomson Reuters Bank Insight, and for nine times the consensus 2013 earnings estimate of $3.68 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $3.28.

Out of 34 analysts covering Wells Fargo, 26 rate the shares a buy, while seven have neutral ratings and one analyst recommends selling the shares.

Wells Fargo is among the "quality regionals" that Sterne Agee analyst Todd Hagerman listed on Monday as preferred picks for investors.

Guggenheim Securities analyst Marty Mosby said last week that with the completion of the integration of Wachovia, Wells Fargo will "take advantage" of the development of their franchise, "as well as the integration expenses going away in the second quarter."

Mosby said in April that "WFC's plan to remove $1.5 billion in quarterly operating expenses throughout 2012 is expected to begin to impact earnings in the second quarter of this year, generating an acceleration in sequential earnings per share growth next quarter," adding that although "one of the biggest concerns about WFC, in our view, has been whether revenues would grow in 2012," the company during the second quarter "increased revenues sequentially by $1 billion, as fee income sources rebounded."

Mosby's price target for Wells Fargo is $43, and he estimates the company will earn $3.43 a share this year, followed by EPS of $3.84 during 2013. The analyst said that "Over time, if management can replicate the prior era of consistent earnings per share growth, we expect WFC to produce 13% to 18% in annualized total shareholder returns."

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

Shares of JPMorgan Chase closed at $35.79 Monday, returning 9% year-to-date, following a 20% decline last year. The shares have pulled back 23% from their year-to-date closing high of $46.49 on March 27.

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Based on a 30-cent quarterly payout, the shares have a dividend yield of 3.35%.

Following the completion of the Federal Reserve's annual bank holding company stress tests in March, JPMorgan's board of directors authorized $12 billion in common share repurchases for 2012, with another $3 billion in buybacks authorized for the first quarter of 2013.

But even Citigroup analyst Keith Horowitz -- who continues to rate JPMorgan a "Buy," with $45 price target, believing the shares offer investors the best potential absolute returns in the space," among the largest U.S. bank holding companies, -- said on Friday that he was "assuming lower buyback activity of $5 bln in 2012 to be conservative."

JPMorgan's shares trade for 1.1 times tangible book value and for just 6.5 times the consensus 2013 earnings estimate of $5.54 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.67.

Hagerman said on Monday underlined the headline risk being faced by JPMorgan Chase and its shareholders, saying that "the outsized trading loss and break-down in internal controls could potentially place JPM under some form of supervisory action down the road following the completion of various regulatory reviews of the loss and associated enterprise risk management processes/controls," and that "the ongoing review and/or the possibility of supervisory action could possibly curtail, or even cease the company's capital buyback abilities sooner rather than later."

So investors looking to load up on JPMorgan amid such a sharp pullback may want to do it methodically.

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

The comparison of the companies' earnings and stock multiples clearly show that Wells Fargo is the more conservative choice for long-term investors, and although the market valuation may seem high at over twice tangible book value, U.S. Bancorp -- with even stronger earnings performance over the past year -- trades even higher at over three times tangible book. On a forward P/E basis, Wells Fargo still looks cheap.

For investors with shorter term horizons looking to take advantage of market disruption from a "perfect storm" of very bad political timing and heavy headline risk, JPMorgan Chase could be just the ticket

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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.

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