We are at the end of this series, and I will present the conclusions and recommendations. I'm evaluating Citigroup (C), Goldman Sachs (GS), Bank of America (BAC), and JPMorgan (JPM) in terms of the underlying businesses. In other words, how these companies are performing and how they are performing in relation to each other. Below is the list of previous articles:
- Under The Hood: Bank Stocks, Part I
- Under The Hood: Bank Stocks, Part II
- Under The Hood: Bank Stocks, Part III
- Under The Hood: Bank Stocks, Part IV
- Under The Hood: Bank Stocks, Part V
- Under The Hood: Bank Stocks, Part VI
Revenue is declining for all four firms. That said, JPMorgan and Citigroup have been able to increase net income. Further, Citigroup and JPMorgan increased cash flow from operations. As investors in common equity, we care primarily about the firm increasing total equity. Citigroup and JPMorgan increased total equity.
Common equity investors also factor into their investment decision the profitability of the firms. JPMorgan and Citigroup are the two most profitable firms. Aside from having the highest net profit margin, both firms are increasing net profit margin. That trend continued into the first two quarters of this year.
Also, firms with higher financial leverage, that increase earnings, boost returns to shareholders. Citigroup and JPMorgan rank second and third in financial leverage.
While Goldman Sachs' return on equity declined between 2009 and 2011, JPMorgan and Citigroup were able to maintain return on equity and led the group in that category. The trend of return on equity continued into 2012.
Further, while Goldman Sachs and Bank of America are losing market share in terms of revenue, Citigroup's share of revenue has been stable and JPMorgan's share of revenue is increasing.
In terms of valuation, Citigroup's valuation isn't reflecting the improved fundamentals of the firm. JPMorgan is fairly valued, but should be purchased on declines in valuation. Investors should use the two times sales level as an accumulation level.
There is some potential for macro-economic weakness and weakness in the macro economy should be used as an opportunity to accumulate shares of JPMorgan and Citigroup.
That said, Citigroup is the more speculative or volatile issue and JPMorgan is investment grade or less volatile.
- JP Morgan -- Buy
- Citigroup -- Buy
- Bank of America -- Neutral
- Goldman Sachs --Neutral
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.