NEW YORK (TheStreet) -- Several weeks ago I reviewed 11 of the largest banks before earnings and identified those that you could expect earnings surprises from. Now, in a new series of articles, I will break down the earnings results and identify the best investment opportunities among these banks plus 22 other financial service firms/banks in four different categories: the four largest money centers (this article); 12 regional banks, nine financial service firms (credit card companies, asset management firms) and eight global banks with an extensive U.S. presence.
So, how did the largest money center banks with assets of more than $1 trillion fare, and how can you profit going forward? Among the groups I follow, the megabanks had the lowest rate of meeting or beating analysts' estimates, at 50%, and stock price appreciation of just 0.4% over three weeks, which is the lowest of all other groups including the 12 largest regionals, at 0.5%, eight global banks, at 0.9%, and the nine financial service companies, at 1.6%. The table below indicates key metrics and highlights which banks met or beat earnings and those that missed and by how much.
Of the four megabanks, only two met or exceeded first-quarter 2014 expectations: Wells Fargo (WFC) beat by 9.4%, and Citigroup (C) beat by 6%. The two that missed -- JPMorgan Chase (JPM), by 9.2%; and Bank of America (BAC), by 200% -- missed due to litigation expense on mortgage fraud settlement charges. Clearly the winner of the group was Wells Fargo with the best beat and highest share price appreciation over the last 22 days, just prior and after earnings, of 3.9%.
Wells also is the most consistent of the group, beating in all but one of the last 12 quarters. However, based on book value, Wells Fargo is not cheap at 1.62 times book. The other winner of the group was Citigroup, and although it failed the second half of the Federal Reserve's Stress Test (CCAR) for shareholder distributions and had the lowest number of beats in the last three years, it performed admirably this quarter, with a 6% beat and 3.2% price appreciation over three weeks. Additionally, it is the cheapest stock based on price-to-book ratio, which is 0.72.
As predicted from the previous article written ("How Investors Can Cash in on Bank Earnings"), JPMorgan Chase and Bank of America were the most vulnerable for downside surprise based on most recent history and analytics. Although JPMorgan's miss was only 9.2%, Bank of America missed by 200%. Both stocks were hit with three-week stock price losses of 3.2% and 5.4%, respectively. Bank of America's stock losses were further exacerbated by the management admission of a capital calculation error on the Merrill Lynch unit that led to a temporary suspension of share repurchase buybacks and subsequently approved dividend increases.
So, if you took my advice you could have cashed in nicely over the last three weeks, but what do you do now if you missed that opportunity or are a long-term investor with a buy-and-hold strategy? The table below shows the revised fiscal year earnings estimates for 2014 and 2015 along with price targets and potential returns.
Over the next year, the best plays based on current valuations and stock price appreciation for FY2014 would be JPMorgan Chase and Citigroup with expected returns of 49% based on a historical industry price-to-earnings ratio of 15. Current stock prices would give these stocks some of the lowest forward looking P/E ratios, at 10 times. However, given that JPMorgan has missed its last three quarterly results and may be subject to further downward revisions, I would lean more toward Citigroup for reliable upside potential.
Currently the forecast for Wells Fargo provides a nice projected return of 23.3% for 2014 and with the company's ability to deliver consistent earnings growth that beat estimates, it would probably be the safest play.
For Bank of America, in the short term over the next six to 12 months, I would not be a buyer of additional shares unless the stock dipped below $15 share because of uncertainty with its future plans for excess capital distributions and the newly filed Department of Justice lawsuit for $13 billion. Although this will most assuredly be settled at less than the full value, the current drag on earnings could be anywhere from $1.24 per share to 57 cents per share if settled, based on what Bank of America has forecast in litigation expenses going forward.
Once these additional mortgage litigation charges and capital distribution plans are resubmitted, Bank of America will be a strong performer in the back half of 2014 and FY 2015. The expected stock price return for 2015 should lead the group with an almost 62% return, which would far outpace the second best performer for 2015 in Citigroup at 16.2%.
I am of the opinion that with over $50 billion in settlement charges since the financial crisis began, or $4.76 in earnings per share, that the light is at the end of the tunnel for Bank of America. Current management with Brian Moynihan as CEO has done an excellent job of ridding the bank of its former toxicity with perhaps one of the worst acquisitions in banking history with the imploding of the Countywide Mortgage mess. He deserves at least some credit for taking the pain now and swiftly settling litigation as it comes up instead of dragging it out indefinitely.
At the time of publication the author had positions in BAC, C and WFC.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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