We get a slew of Financial Services names reporting their second quarter financial results this week, starting with Citigroup (C) on Monday morning, July 15th, following all the way through to Friday, July 19th, if you want to include GE Capital, General Electric's (GE) financing arm, in the mix. We would include GE Capital here, but GE and GE Capital deserve their own earnings preview later this week.
Financials as a sector are roughly 17% of the SP 500 by market cap, and are expected to generate 17.5% in Q2 2013 year-over-year (y/y) earnings growth on 5% revenue growth.
Here is a quick "top-down" look at Financials as a sector, in terms of second and third quarter 2013 earnings growth and full-year earnings growth, as detailed by ThomsonReuters:
|q2 13||q3 13||q4 13||2013||SP 500|
|Jul 12 13||17.5%||12.4%||25%||17.9%||6.9%|
|Jul 1 13||17.5%||12.5%||25.1%||18.1%||7.4%|
|Apr 1 13||17.6%||11.3%||24.6%||15.4%||8.2%|
|Jan 1 13||19.2%||12.2%||26.1%||16%||10.3%|
|Oct 1 12||18.6%||13.7%||12.4%||12%|
* Source: ThomsonReuters "This Week in Earnings"
The last column is the SP 500 full-year earnings growth estimates, so as a sector, Financials are expected to generate roughly 3(x) the earnings growth rate of the SP 500 as a whole for 2013, and even greater than that for the second quarter 2013.
For Q2 2013, revenue growth for Financials is expected at +5%, versus the SP 500's +1.2%.
Here is a brief preview of the reports due out this week, and our take on the company and valuation. You may or may not agree with our conclusions for the individual companies, and we may not preview all that are scheduled to report.
Citigroup: Reports Monday, July 15th before the bell. Consensus estimates for C are looking for $1.17 in earnings per share (EPS) on $19.746 billion in revenue for expected y/y growth of 17% and 6%, respectively. We never really liked the stock in the 1990s under Sandy Weill, and sold it when Travelers was bought. We haven't owned C in years, and likely never will. The dilution has been horrid for C shareholders since 2008 -- the bank has 6(x) the shares outstanding as it did in 2008. I wrote about it here on my blog this weekend, showing the dilution in detail over the last 5 years. Like AIG, C is now a hedge fund favorite. The stock is up nicely in 2013 from $30 to $50 since January 1. We just prefer to shop elsewhere for clients. If I want to own a big bank with capital market exposure, I'll own JPM.
Goldman (GS): Tuesday, July 16th before the bell, GS is scheduled to report $2.78 in EPS for Q2 13 versus over $4 in the first quarter, on $7.87 billion in revenues for expected y/y growth of 59% and 20%, respectively. JPMorgan's trading revenues (core fixed income and equity businesses) rose 18% y/y, which is now the benchmark for GS to be compared to, but expect it to do better. At $160 per share, GS is trading at 11(x) and 10(x) current EPS for 2013 and 2014 of $14.37 and $15.23. $168 is the recent high near the end of May. Watch for a breakout if the SP 500 trades to a record high. It is purely an educated guess on my part, but the death of proprietary (prop) trading could have cost GS $10 per share in "core" earnings. No question, the firm still has the intellectual talent to make money in good markets, but probably not as obscenely as in the past, to placate the regulators. That being said, peak earnings for GS in 2007 were roughly $25 in EPS, but I still think the firm can do $18-$20 in "core" EPS generation. The bright side of the increased regulatory scrutiny is that GS might actually show less volatile earnings in both good and bad markets, and therefore get some P/E expansion on the stock. Without being hyperbolic, and unless GS really blew it on the interest rate or commodity side, I would expect a blowout EPS number.
Charles Schwab (SCHW): SCHW is also scheduled to report Tuesday morning, July 16th before the opening bell, with analyst consensus looking for $0.19 in EPS on $1.3 billion in revenues for expected y/y drop in EPS of 5% on 3% revenue growth.
Here (and here) are our articles from late 2012 and early 2013, which tell you all you need to know about SCHW. However, SCHW's "earnings power" is tied to short-term interest rates and Fed monetary policy, not the longer end of the curve, as some commentators fail to tell you.
SCHW has transformed itself from a discount broker to an asset gatherer starting in the early 2000s. This has made its EPS far less volatile and less reliant on DARTs (daily average revenue trades). SCHW will be a big beneficiary of the "Great Rotation," although some of this might already be priced in with a 30(x) and 25(x) P/E ratio on current 2013 and 2014 expected EPS of $0.74 and $0.87 EPS.
The stock is up 50% year-to-date as of this writing. If there is a correction, we'd be a buyer at $20 and then in the high teens.
There is anywhere from $0.40 to $0.50 per share being masked by the money market mutual fund management fee waiver.
Bank of America (BAC): BAC is scheduled to report Q2 13 financial results before the bell on Wednesday morning, July 17th, with analyst consensus looking for $0.25 in EPS on $22.8 billion in revenue for expected y/y growth of 32% and 4%, respectively. The most compelling aspect to BAC is that it remains one of the few bank stocks still trading near tangible book value (TBV) of $13.25-$13.50. The reason BAC still remains cheap is what some call "legacy mortgage costs," or what is really the huge litigation expense from the Financial Crisis of 2008 and exposure to MBIA, AIG and a host of other poster-children for the worst financial mess since the Great Depression.
My own opinion, with the recovery in housing prices, and as foreclosures and other housing issues dissipate as housing recovers, BAC will put this mess behind it.
However, the question remains, what is the "core earnings growth" for BAC? Forward estimates seem to have stabilized around $1.75-$1.77, but my own opinion is that -- even with the continuing regulatory and capital issues -- BAC should be able to earn $2 per share.
Management needs to continue to settle this lingering litigation and move forward and focus on growth.
Current 2013 and 2014 EPS estimates for BAC are for $0.94 and $1.31, leaving BAC trading at 15(x) and 10(x) forward estimates, with expected growth of 270% and 39%, respectively.
BAC will continue to be an "expense-driven" earnings story for at least 2013. Top line growth would be great. If BAC should trade up to the $19-$20 area, I think it would be pretty fully valued.
American Express (AXP): AXP typically reports after the bell, and is scheduled for Wednesday, July 17th, with analyst consensus looking for $1.22 in EPS on $8.3 billion in revenues for expected growth of 6% and 4%, respectively.
In Q1 13, revenues were light as billed business growth was just 6%, a little less than the expected 7%.
Current consensus EPS estimates in 2013 and 2014 are for $4.79 and $5.27, leaving AXP trading at 16(x) and 14(x) current consensus for expected y/y growth of 9% and 10%, respectively.
AXP has broken out above its 2007 high and has traded very well. We'd buy a pullback to the low $60s. We do not have a big position in AXP, but rather own Visa (V) currently.
Morgan Stanley (MS): Last but not least, MS reports before the bell Thursday morning, July 18th, with analyst consensus looking for $0.43 in EPS on $7.9 billion in revenues for expected y/y growth of 48% and 14%, respectively.
Current EPS consensus for 2013 and 2014 is for $2.04 and $2.54, leaving MS trading at 13(x) and 10(x), respectively, for expected y/y growth of well, a lot in 2013 given the $0.13 full year actual EPS from 2012 and 24% next year.
Like Citi, MS has severely diluted shareholders since 2008, thus, we prefer to own GS, although we do hold some MS for a trade.
Conclusion: The brokers like Goldman Sachs and Morgan Stanley should have sizable beats as Wall Street has never modeled this sector well, ever. Schwab doesn't use its balance sheet to trade, so SCHW's results will be more bank-like, and close to estimates as investors await a change in short-term rates.
Bank of America and Citi will have some capital markets revenue and some traditional bank revenue, and if JPMorgan and Wells were any indication, reserve releases and credit will continue to add substantially to the EPS.
Same with American Express, although billed business should be better.
Over the next 12 months, we do think BAC has the best opportunity for total return given the current valuation, but we would like to see top-line growth versus expense cutting.
The brokers or capital market sensitive names should outperform the traditional banks as long as the equity markets remain a tailwind and if rates don't rise too quickly. Look at the revenue growth for the capital market names like GS and MS versus the bank revenue growth.
|q2 EPS||y/y||Q2 rev||y/y|
Valuations remain reasonable within the group, with the possible exception of Schwab, and the market and economy remain a tailwind.
We'll be watching to see how year-end 2013 growth estimates change for full-year 2013 after financial results are reported.