A lot has happened in the banking sector over the past few years and new devastating events continue to unfold that tarnish one of the largest sectors in the U.S. economy. The JP Morgan (JPM) multi-billion dollar trading loss and the fact 32 banks have been closed YTD make investing in the sector risky to say the least. Many banking stocks have been hit especially hard including JP Morgan, Goldman Sachs (GA), Bank of America (BAC) and Citi Group (C). Two banking stocks have taken a different route and have performed quite well recently. Wells Fargo (WFC) and U.S. Bancorp (USB).
Wells Fargo recently reported second quarter earnings of $0.82 per share beating expectations by $0.01 and revenue of $21.3 billion which was in line with expectations. More importantly the companies key operating metrics continue to improve include ROE of 12.86% up from 12.14% in the prior quarter. Net charge-offs declined again to 1.15% of total assets down from 1.25% in the prior quarter. Both are positive trends. Overall Wells Fargo is operating much better than its peers. Wells has higher pretax margins (28% vs average of 19.2% amongst its peers) and lower debt/enterprise value (50.5% vs an average of 77.1% amongst its peers). Looking forward Wells Fargo's EPS is estimated to reach $3.64 per share for 2013. That number represents solid growth in the next 18 months.
The fundamental picture complements the fact Wells Fargo has performed quite well recently even as the market has experienced volatility. Looking at the chart, the stock has formed a cup and handle near the top of a large trading range.
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I am looking for the stock to breakout on volume around $34. If volume is weak and action is not convincing then I would be cautious as this is the top of a long term trading range.
U.S. Bancorp is reported earnings this morning with an EPS of $0.71 vs. an estimate of $0.69 (17% growth over the prior year) and revenues of $5.07 vs. an estimate of $4.98 billion (8% growth over the prior year). Important take-aways from the report include revenue from mortgage banking more than doubling to $490 million from $239 million in the prior year. U.S. Bancorp operates better than its peers as well. U.S. Bancorp has a pretax margin of 33.5% vs. an average 19.2% amongst its peers. U.S. Bancorp also has debt/enterprise value of 50% vs. 77.1% average amongst its peers.
U.S. Bancorp is up approx. 33% over the past year and has formed a similar base to that of Wells Fargo. U.S. Bancorp also has relative strength vs. the overall market and the banking sector. If the market rallies I expect this stock to breakout.
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Wells Fargo and U.S. Bancorp are not over valued considering they trade at a P/E ratio of 11.26 and 12.62, respectively. Both of these banks are less reliant on complex trading and investment banking profits to drive growth and they have proven their strategies reward investors.
