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Wells Fargo & Co (WFC) and JPMorgan Chase & Co. (JPM) are two large-cap bank stocks with strong cash flow, which comes at an attractive price (P/CF below 8). Both stocks also have stronger ROE and lower P/E compared with peers. WFC and JPM will be reviewed fundamentally and technically in this article. Investing strategies will also be presented.

Wells Fargo & Co

WFC was up 0.24% and closed at $37.30 on March 26, 2013. WFC had been trading in the range of $29.80-$38.20 in the past 52 weeks. WFC has a market cap of $196.60B with a beta of 1.36. WFC remains a great long-term buy with its solid fundamentals and inexpensive cash flow.

Analysts' Calls and Estimates

On March 13, 2013, BMO Capital initiated coverage on WFC with a market perform rating and a price target of $40.00. Analysts currently have a mean target price of $39.51 for WFC, suggesting 5.92% upside potential. Analysts, on average, are estimating an EPS of $0.88 with revenue of $21.58B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $3.64 with revenue of $85.61B, which is 0.60% lower than 2012. However, for 2014, analysts are predicting an EPS of $3.89 with revenue of $86.43B, which is 1.00% higher than 2013.

Increasing Book Value and Attractive Price to Cash Flow

WFC's book value had been increasing steadily in the last five years and reached $146.03B by the end of 2012. WFC's free cash flow had been growing throughout 2012. WFC's current price to cash flow has been consistent since late 2010, and its ratio of 3.403 is extremely attractive, as seen from the chart below.

(click to enlarge)

Source: YCharts.com

There are a few positive factors for WFC:

  • Higher net margin of 20.9% (vs. the industry average of 11.4%)
  • Stronger ROE of 13.2 (vs. the industry average of 5.7)
  • Lower debt/equity of 0.9 (vs. the average of 1.2)
  • Lower P/E of 11.1 (vs. the industry average of 14.3)
  • Lower Forward P/E of 9.5 (vs. the S&P 500's average of 13.9)
  • WFC has a total cash of $206.53B and a total debt of $184.55B with a book value of $27.66 per share
  • WFC currently offers an annual dividend yield of 2.68%

Technically, the MACD (12, 26, 9) indicator had turned to show a bearish trend on the last trading day. The momentum indicator, RSI (14), is picking up slightly and indicating a bullish lean at 61.73. WFC is currently trading above its 50-day MA of $35.66 and 200-day MA of $33.91, as seen from the chart below.(click to enlarge)

Source: StockCharts.com

How to Invest

From the perspective of value investing, WFC provides one of the best values in banking stocks. With its efficient management and simple business model, WFC remains a great long-term buy. For bullish investors, a credit put option spread of June 22, 2013 $33/$35 put can be reviewed, which will allow investors to gain some upside credit premium or to acquire WFC shares at a price below $35 upon options expiration. Investors can also review the following ETFs to gain exposure to WFC:

  • Dow Jones U.S. Financial Services Index Fund (IYG), 11.01% weighting
  • Financial Select Sector SPDR (XLF), 8.16% weighting
  • Dow Jones U.S. Financial Sector Index Fund (IYF), 6.17% weighting

JPMorgan Chase & Co.

JPM was up 0.25% and closed at $48.64 on March 26, 2013. JPM had been trading in the range of $30.83-$51.00 in the past 52 weeks. JPM has a market cap of $186.17B with a beta of 1.37. With the recent pullback, it creates a long-term buying opportunity for JPM.

Analysts' Calls and Estimates

JPM was last reiterated by FBR Capital with a market perform rating and a target price of $46 (increased from $43). Analysts, on average, have a mean target price of $54.47 for JPM, suggesting 11.99% upside potential. Analysts, on average, are estimating an EPS of $1.38 with revenue of $25.96B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $5.48 with revenue of $100.46B, which is 0.60% higher than 2012. For 2014, analysts are predicting an EPS of $5.80 with revenue of $102.67B, which is 2.20% higher than 2013.

Increasing Book Value and Low Price to Cash Flow

JPM's book value had been increasing steadily in the past 5 years and reached $195.01B by the end of 2012. However, JPM's free cash flow had been declining since early 2012. Despite the declining free cash flow, JPM's price to cash flow of 7.414 remains low, as seen from the chart below.

(click to enlarge)

Source: YCharts.com

There are a few positive factors for JPM:

  • Higher net margin of 20.5% (vs. the industry average of 13.2%)
  • Stronger ROE of 10.7 (vs. the average of 6.7)
  • Lower debt/equity of 1.3 (vs. the industry average of 2.1)
  • Lower P/E of 9.3 (vs. the industry average of 18.8)
  • Lower Forward P/E of 8.2 (vs. the S&P 500's average of 13.9)
  • JPM has a total cash of $919.04B and a total debt of $704.99B with a book value of $51.27 per share

Technically, the MACD (12, 26, 9) indicator is showing a bearish trend. RSI (14) is indicating a slightly bearish lean at 46.73. JPM is currently trading above its 200-day MA of $41.29 and slightly above its 50-day MA of $48.43. The next resistance is $50.12, the R1 pivot point, followed by $51.31, the R2 pivot point, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

JPM is technically bearish in the near term. Investors can watch out for its 50-day MA support at $48.43. It is safer to establish the long-term position upon seeing further price stabilization. In the long term, JPM remains a good buy with its solid fundamentals and low P/FC. Investors can also review the following ETFs to gain exposure to JPM:

  • Dow Jones U.S. Financial Services Index Fund , 11.42% weighting
  • Financial Select Sector SPDR , 8.46% weighting
  • Dow Jones U.S. Financial Sector Index Fund , 6.40% weighting

Note: All prices are quoted from the closing of March 26, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: Wells Fargo And JPMorgan Chase: Buying For Solid Fundamentals And Inexpensive Cash Flow