Since I first published my bullish article on Barclays (BCS) here, the stock has soared by 47.4%, beating the S&P 500 (SPY) by 3,180 bps. While I continue to find some upside in the firm, the more attractive value play is UBS. Bearish sentiments currently surround UBS with the Street rating shares near a "sell." With the bar set low for earnings target, however, UBS is well positioned to generate high risk-adjusted returns with a macro recovery.
From a multiples perspective, financials are exceptionally cheap. UBS trades at a respective 3.5x and 8.7x past and forward earnings while Deutsche Bank (DB) and Barclays trade at a respective 7.1x and 15.7x forward earnings. The Street is currently most bullish about Barclays and rates it a "strong buy" versus a "hold" for Deutsche Bank and a "sell" for UBS.
At the third-quarter earnings call, Barclay's CEO, Robert Diamond, noted solid progress:
I think of our performance in the first 9 months is reassuring. It has been a period of considerable challenge and uncertainty. I think all of you have been able to see that. We've delivered a solid financial performance despite significant economic and market pressures. Our adjusted profit before tax of GBP 5 billion is up 18% over the 9 months last year, that includes GBP 1.3 billion of adjusted profit in the third quarter. One of the things that really pleases me is that the profit delivery was very, very balanced. So if you look at RBB, the Retail and Business Bank, with wealth, that was about the same, 55th [ph] to roughly 1/2 the PBT, as it was in the Corporate and Investment Bank. And I think the power of the diversification truly comes through in the first 9 months of this year.
The company, however, was recently downgraded by the S&P 500 and as time passes the ROE target of 13% by 2013 becomes increasingly questionable. Slowing asset quality is further limiting the gains derived from cost reduction. The company is employing tax havens, which will inevitably become less of a regulatory target when the global macroeconomy picks back up.
Consensus estimates for Barclay's EPS forecast that it will decline by 13% to $1.61 in 2011, and then by 29.2% more in the following year. Consensus estimates for EPS have fallen for a net change of -13%. Assuming a multiple of 15x and a conservative 2012 EPS of $1.11, the rough intrinsic value of the stock is $16.65, implying 13% upside.
The European Parliament's Vice President suggested possibly shortening the deadline for realizing a 4.5% CT1 ratio (Basel III) by two years to January 2013. With UBS heading toward a CT1 ratio (Basel III) of 14% by 2013, it has optimal liquidity. Instead of focusing on restructuring the balance sheet, management should consider driving ROE momentum through greater share repurchases. The company's long-term refinance operations are hoping to reign in volatility. Operationally, wealth management is yielding strong flows despite a low interest rated environment while investment banking revenue is trending toward a double-digit year-over-year decline. Management is further taking appropriate actions to mitigate risks pertaining to franchise impairment as evidenced by how other financials are mimicking UBS' initiatives.
Consensus estimates for UBS' EPS forecast that it will decline by 40.6% to $1.11 in 2011, and then grow by 25.2% and 18% in the following two years. Assuming a multiple of 13x and a conservative 2012 EPS of $1.35, the rough intrinsic value of the stock is $17.55, implying 22.1% upside.