Top U.S. Financial Stocks For 2012 By Barclays

Includes: ACE, AXP, C, HPQ, MET, NYX, TCB
by: Insider Monkey

Barclays has recently published their equity outlook for 2012. Their outlook on the financial services is cautious largely due to skepticism from the Euro contagion and U.S policy risks for the financial services industry. However there are few stocks that stand to benefit from the slow anticipated U.S. economy recovery.

Barclays’ top buys from the U.S. Financial Services industry include:

ACE Limited (NYSE:ACE) is a global leader in insurance and reinsurance with a market cap of $23.70 Billion. ACE is currently priced at $68.68 per share but Barclays have projected a target share price of $73.00 per share. ACE has the advantages of global scale and could benefit from the recent improving P&C prices. Barclays expect ACE to deliver a respectable ROE of 10% in 2012 with less volatility than peers, which leads them to believe that ACE shares are undervalued.

American Express (NYSE:AXP) is a leading market player in the consumer finance sector with a market cap of $57.10 Billion. AXP’s current price per share is $47.81 whereas Barclay’s estimated target price per share is at $60.00. AXP is poised to outperform in 2012 as 1) double-digit card spend growth and 2) operating leverage and expense flexibility should contribute to earnings growth. Trading at just 11x earnings, Barclays believe the shares are significantly undervalued on an absolute basis and relative to the stock’s historical premium to the S&P 500 and other financials. Warren Buffett had the largest position in AXP among the 350+ funds we are tracking.

Citigroup Inc. (NYSE:C) is a large-cap bank with a current market cap of $87.05 Billion. Citi’s current price per share is $27.75 and Barclays expects this share price to stand at $50.00. Barclays rates Citi with potential for the most growth in the large-cap bank sector. Underlying reasons include 1) the resumption of capital redeployment through dividend increase and share repurchase; 2) further downsizing of non-core Citi Holdings’ assets; 3) continued focus on expense controls; 4) growth in its emerging market (NYSE:EM) footprint; 5) utilization of its $50 billion deferred tax asset; and 6) improved profitability metrics. With both the U.S. economy recovering and significant footprint in the emerging markets, Citi is in a unique position to benefit from both. Citigroup trades at a P/E of 6.1x marking an historical valuation low. For reference, its 10-year P/E average is closer to 11.9x. Activist hedge fund manager Bill Ackman had nearly $700 million invested in Citigroup at the end of September.

MetLife Inc. (NYSE:MET) is a leading provider of insurance, annuities, and employee benefit programs. Met has a market cap of $34.88 Billion. MET’s current share price of $30.96 is expected to swell to a target share price of $40.00, according to Barclays. MET is the top pick in the insurance sector for Barclays as it stands to benefit from increased revenues from the Alico acquisition. Barclays feels MET’s current P/E valuation of 6x is undervalued and expects the same to be 8x. Activist investor Ralph Whitworth’s Relational Investors had $372 million in MET at the end of September. Whitworth was recently in the news because of his large stake in Hewlett-Packard (NYSE:HPQ). Whitworth got a seat on the board of HPQ and the stock price responded positively to that news.

NYSE Euronext, Inc. (NYSE:NYX) is a leading broker in the financial services sector. NYX’s market cap is $7.15 Billion. The current share price is $26.89, however Barclays’ estimated target share price is $38.00. Barclays understand that NYX is a potential acquisition target for Deutsche Boerse, but despite these circumstances – Barclays claim that NYX will stand to rise in stock either through synergies or through their standalone EPS growth. NYX is trading at a P/E of 9x, lower than the sector average of 11x. Barclays believes the multiple does not give NYX credit for its steady expected EPS growth, strong FCF yields and focus on returning capital to shareholders.

TCF Financial (NYSE:TCB) is a mid-cap bank with a market cap of $1.66 Billion. The company’s current share price is $9.60 and Barclays projected target price per share is $22.00. Barclays expects TCB to outperform its mid-cap bank peers in 2012 as it benefits from: 1) starting to recapture lost revenue ($60 million) from the Durbin Amendment; 2) accelerating balance sheet growth driven by more than $1.3bn in new assets from BRP and Gateway One deals; 3) market gains from new product in 4Q11; 4) declining loan loss provision in 2H12; TCB trades at 11.0x compared to its 10-year average of 13.8x.

Disclosure: I am long C.