Financial Stocks Back to Normal in 2014

NEW YORK (TheStreet) -- Investors growing more confident in the viability of banks, insurance companies and investment firms have pushed stock price multiples much higher this year, but in 2014, price appreciation will once again be driven by increases in analysts' earnings estimates, according to KBW.

"As financial stocks continue to rally, and with most financial stocks above tangible book value and significant earnings multiple expansion since 2011, the room for further expansion in multiples is becoming limited, in our view," wrote KBW analyst Frederick Cannon in a note to clients on Sunday.

Cannon noted that the "S&P 1500 Financials excluding the Real Estate Sector is up nearly 42%" this year, compared to a "32% gain for the overall market."  KBW's data also shows that "the rally in financials tracked positive earnings estimate revisions reasonably closely most of the year. However, the rally in stocks during the fourth quarter was despite a weakening trend in earnings estimate revisions."

The outsized price-to-earnings multiple expansion for financial stocks this year and last shows just how beaten-down financial names were in the wake of the credit crisis and recovery. But when investors consider the continued forward price-to-earnings multiple expansion, even as consensus earnings estimates decline during the fourth quarter, things may seem a little hot.

Looking ahead, investors will see the usual catalyst for large-cap bank stocks in march, when most of the banks are expected to announce dividend increases and/or increases in plans to buy back shares, following the Federal Reserve's annual round of stress tests.

The Federal Open Market Committee's recent decision to begin tapering the Federal Reserve's monthly purchases of long-term bonds is pushing long-term rates higher.  While this move will provide a bit of a boost for banks' net interest margins, the banks are looking for a parallel rise in interest rates, which can only come about when the Fed moves the target for the short-term federal funds rate above the current range of zero to 0.25%, where it has been stuck since late 2008.

But for insurers, the rise in long-term rates will provide plenty of fuel for 2014.

Following through on the theme of rising consensus earnings estimates being a key driver for financial stocks for 2014, KBW on Sunday highlighted the nine large-cap (over $10 billion) financial names it rates "outperform," with 2014 earnings-per-share estimates higher than the consensus.  It will be fascinating to see whether or not the consensus "catches up to KBW's estimates.

Here they are, in alphabetical order:

  • Ace Limited (ACE) -- The property and casualty insurer's shares have returned 30% this year through Friday's close at $102.62.  The shares trade for 12.2 times the consensus 2014 earnings estimate of $8.40 a share, among analysts polled by Thomson Reuters, and for 11.6 times the consensus 2015 EPS estimate of $8.83.  KBW is out in front of the consensus, estimating Ace will earn $8.97 a share in 2014, with EPS rising to $9.21 in 2015.
  • Allstate Corp. (ALL) -- The shares closed at $53.65 Friday, returning 36% this year.  The shares trade for 10.3 times the consensus 2014 EPS estimate of $5.22, and 9.5 times the consensus 2015 EPS estimate of $5.66.  KBW estimates Allstate will earn $5.30 a share in 2014, with EPS rising to $5.80 in 2015.
  • Ameriprise Financial (AMP) -- The shares closed at $113.94 Friday, returning 87% this year.  The shares trade for 14.6 times the consensus 2014 EPS estimate of $7.81, and 12.7 times the consensus 2015 EPS estimate of $8.98.  KBW estimates Ameriprise will earn $7.95 a share in 2014.  The firm is slightly behind the consensus for 2015, with an EPS estimate of $8.95.
  • American Express (AXP) -- The shares closed at $89.19 Friday, returning 57% this year.  The shares trade for 16.5 times the consensus 2014 EPS estimate of $5.42, and 14.8 times the consensus 2015 EPS estimate of $6.01.  KBW's 2014 EPS estimate for American Express is $5.43, rising to $6.00 for 2015.  Please see American Express Settlement Is Small Bump in Road for much more on the company.
  • Blackstone  (BX) -- The shares closed at $31.35 Friday, returning a remarkable 113% this year.  The shares trade for 10.8 times the consensus 2014 EPS estimate of $2.90, and 9.3 times the consensus 2015 EPS estimate of $3.38.  KBW's 2014 EPS estimate for Blackstone is $3.50, rising to $3.75 for 2015. The investment firm's latest deal is a $200 million investment in Crocs  (CROX).
  • Franklyn Resources (BEN) -- The shares closed at $57.23 Friday, returning 38% this year.  The shares trade for 15.3 times the consensus fiscal 2014 EPS estimate of $3.75, and 13.8 times the consensus 2015 EPS estimate of $4.16.  KBW estimates the asset manager will earn $3.80 a share a share in fiscal 2014 (which ends on Sept. 30), with EPS rising to $4.20 in 2015.
  • Intercontinental Exchange Group (ICE) -- The shares closed at $224.74 Friday, returning 82% this year.  The shares trade for 19.8 times the consensus 2014 EPS estimate of $11.34, and 16.5 times the consensus 2015 EPS estimate of $13.65.  KBW estimates ICE will earn $11.90 a share in 2014, with EPS rising to $14.35 in 2015.
  • Invesco (IVZ) -- The shares closed at $34.49 Friday, returning 36% this year.  The shares trade for 14.1 times the consensus 2014 EPS estimate of $2.45, and 12.4 times the consensus 2015 EPS estimate of $2.78.  KBW's 2014 EPS estimate for the investment manager is $2.50, rising to $2.85 for 2015. 
  • MetLife (MET) -- The shares closed at $53.96 Friday, returning 68% this year.  The shares trade for 9.5 times the consensus 2014 EPS estimate of $5.70, and 8.8 times the consensus 2015 EPS estimate of $6.14.  KBW estimates MetLife will earn 577 a share in 2014, with EPS rising to $6.15 in 2015.  Please see Analysts Love MetLife for 2014, for much more on the company, including its unique stance on share buybacks.

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

>Contact by Email.

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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