Financial stocks have done quite well year-to-date as shares of some of the most prominent names are at or near their 52-week highs. However, as with every sector, not every name within the group should be assessed the same.
JPMorgan and Wells Fargo led things off last week with not-great-but-decent results. And investors are eager to see if the rest of the sector will issue better performances or just follow suit, which would not be such a bad thing. Here are the names to consider.
Buy Bank of America (BAC)
I was called crazy for my recent support of Bank of America. Despite what the bears may want to believe, this is still a dominant name within a sector that is continually improving. While I have never suggested that Bank of America is flawless, the bank also deserves credit for making moves to reduce its risks and return value to shareholders.
On Wednesday, the bank will report first-quarter earnings and the Street is looking for profits of 23 cents per share, which would represent a year-over-year decline of 26%. Then again, this is 6% better than three months ago, when analysts were (then) expecting earnings-per-share to arrive at 21 cents, which means the Street has gotten a bit more bullish.
Revenue is expected to arrive at $23.5 billion, which would represent almost a 13% decline from the $26.9 billion posted a year ago. While it's true that Bank of America has posted consecutive quarters of revenue declines, the bank has nonetheless instituted measures to ensure its long-term success. The bank has every right to feel confident heading into the first quarter report.
Investors should also feel encouraged that the board of directors recently approved a stock buyback program valued up to $5 billion in its common stock and $5.5 billion in its preferred stock. As it stands, these shares are still discounted to the bank's tangible book value. While it is clear that Bank of America is not getting the benefit of the doubt here, it is also very evident that progress is being made
Buy American Express (AXP)
Credit-card giant America Express didn't have an exceptionally strong fourth-quarter. Earnings fell almost 50% year over year due to several one-time charges, which included a $400 million restructuring cost as part of the company's migration towards a business that supports more users online and via smartphones.
The company earned $637 million, which was down from $1.2 billion earned during the same period in the prior year. However, revenue arrived at $8.14 billion, climbing 5% year over year. While this was not a robust performance, it was still enough to meet Street estimates.
On Wednesday the company will look to rebound from these numbers and get investors more excited about the rest of the year. Consensus estimates are looking for earnings-per-share to arrive at $1.10. While EPS estimates are down 1 penny from three months ago, this would represent almost a 3% increase year over year.
Revenue is expected to arrive light at $8.05 billion or 2% lower year-over year from $8.19 billion posted a year ago. Regardless of the numbers posted in this quarter, American Express is a solid play on the financial sector that also pays a decent yield at 1.20%.
Consider Wells Fargo (WFC)
While I'm bullish on American Express, I can certainly understand why some investors would sneer at the fact that the bank is trading near its 52-week high and the P/E of 16 is not cheap.
Those investors should consider Wells Fargo, which just reported strong first-quarter earnings that arrived at 92 cents per share, which beat Street estimates by 4 cents. However, revenue was light - arriving at $21.3 billion versus estimates of $21.59 billion.
However, given that profits soared 23%, it's hard to be disappointed. What's more, this is yet another example of how Well Fargo continues to demonstrate solid execution and leverage. This is despite prolonged weakness in interest rates. Not only is Wells one of the safest banks on the market, it is arguably the cheapest.
Hold PNC Financial (PNC)
Shares of PNC Financial are up 14% on the year and are just 3% away from a new 52-week high. It seems recent concerns about the competition and the company's perceived inability to produce long-term return on equity has not been enough to keep investors away from the stock.
While PNC has done a great job cleaning up its credit profile, the company is not a flawless operation. Unlike some of it regional peers, the increase levels of bad debt on its books have become a concern. In this environment, it would go a long way if management were able to work the debt down in a meaningful level.
Granted, this has not shown to have impacted the company's performance, but it's a risk. Along similar lines, I think expenses have risen a bit too much. High debt risk with increased expenses does not make a great combination. There are also many positives here as well. In the most recent quarter, the bank posted strong net interest income, with an 11% sequential surge in fees.
On Wednesday, the bank will look to build on this performance when it reports its Q1. The Street is looking for earnings to arrive at $1.57 per share, which would be down 6% year-over-year from $1.67 per share. Analysts are also expecting revenue to drop more than 2% to $3.98 billion.
However, revenue has increase in the past two quarters, including growing more than 10% to $4.33 billion in Q4. Still, I wouldn't jump on these shares here - not until I see more progress with expenses and the high risk debt that's still on the books.
Consider JPMorgan (JPM)
Instead, I would look to add to JPMorgan, which just reported first-quarter earnings and is trading at a P/E ratio that is 4 points lower than PNC. Although investors weren't too pleased with JPM's report, relative to expectations, it was actually pretty good.
JPMorgan posted earnings of $1.59 per share and a 33% increase in net income, which arrived at $6.5 billion. Despite the 3% decline in revenue, which arrived at $25.8 billion, JPMorgan managed to lower its provision for credit losses by $107 million, or 15%.
The bank was able to gain $126 million from a wider spread of its own credit which was advantageous to the extent of 18 cents per share in earnings. What's more, even when this benefit was adjusted out, the bank still would have beaten consensus estimates by 3 cents. This is a well managed brand that should outperform the rest of the year.