What follows is a list of financials with various degrees of upside. In generally, I remain bullish on the sector due to the irrational level of risk discounting. While the JPMorgan (NYSE:JPM) $2B trading loss may have made investors even more fearful about financials, the fundamentals of the industry are still the strongest in the world and the strongest in history. Not surprisingly, they make up a leading portion of value funds, which have historically outperformed growth funds.
Fifth Third (NASDAQ:FITB)
Fifth Third trades at a respective 9x and 8.9x past and forward earnings with a dividend yield of 2.4%. Consensus estimates forecast Fifth Third's EPS growing by 25.2% to $1.49 in 2012 and then by 1.3% and 13.9% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $1.48, the stock would hit $19.24 for 44.2% upside.
First quarter performance was excellent with adjusted diluted EPS growing 9% sequentially. Top-line results beat consensus across the major divisions of mortgage, advisory, and corporate banking. Market share gains further add weight to this value story. Given my belief in a quicker than expected recovery, i anticipate Fifth Third outperforming broader indices at least over the next one to three years.
Huntington trades at a respective 9.9x and 9.2x past and forward earnings with a dividend yield of 2.6%. Consensus estimates forecast Huntington's EPS growing by 6.8% to $0.63 in 2012 and then by 6.3% and 13.4% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $0.63, the stock would hit $8.19 for 33% upside.
Revenues grew 9% sequentially in the first quarter while credit quality showed improvements. What makes Huntington attractive is that it is increasing scale just in time to capitalize off of a full recovery. The Fidelity Bank integration will produce meaningful synergies and help unlock value in light of the stock's beta of 1.7. Accordingly, I strongly recommend the stock.
US Bancorp (NYSE:USB)
US Bancorp trades at a respective 11.6x and 10.1x past and forward earnings with a dividend yield of 2.6%. Consensus estimates forecast US Bancorp's EPS growing by 14.9% to $2.77 in 2012 and then by 8.7% and 11% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $2.97, the stock would hit $38.61 for 27.6% upside.
During the first quarter, US Bancorp showcased solid momentum with top-line growth of 9.1%. The stock is still relatively near its 52-week high and is roughly as volatile as the broader market. This will mitigate the likelihood of the stock producing high risk-adjusted returns. Even still, in light of the market trading at roughly 2x its PE multiple, US Bancorp looks healthy as a value play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer.