Last week we brought up the issue that earnings season was getting a bias. So far, that bias is of selling the news. Frankly, with so many stocks up 75% to 200% from the lows of 2009 and with there not really being a single 5% pullback seen the bear market reversed in a bull market after March 9, 2009, this should be a welcoming sign for investors. So now earnings season is afoot, and while there are dozens of companies on deck, this week could be called Banker’s Alley. The new bank taxes are a wild card that was not even an issue a week ago, and that is part of the added weakness. You will probably see more estimates given on that front by the major banks on their targets about what the new taxes may cost them.
On Friday JPMorgan Chase (JPM) posted very solid numbers on the earnings front. Jamie Dimon and friends turned in $0.74 EPS rather than the Thomson Reuters estimate of $0.62 EPS. The 2.25% drop took the stock down to $43.68, and that is still very much at the high-end of the 52-week trading range. There were some issues that led to a sell-the-news reaction in the bank. First and foremost, the revenue figures were light by the tune of about 6% at $25.2 billion, and that was the first “issue” from investors who wanted to see a blowout on all fronts. But at JP Morgan there was an issue of loan losses rising, the dividend was still addressed as a “later rather than sooner” issue, Jamie Dimon remained cautious despite saying that a recovery was taking place, its retail operation posted a loss and it set aside more loss reserves by 15% from a year ago and by about 5% sequentially from last quarter. Interestingly enough, the bank team that replaced Meredith Whitney at Oppenheimer raised its analyst rating on JPMorgan to “Outperform” from “Perform.”
Citigroup (C) kicks off the week with earnings on Tuesday morning. Due to the massive re-dilution of the TARP repayment financing and due to the less than perfect performance of its loan portfolio and its investments (let alone the largest restructuring of all money center banks), trying to use the same metrics for Citi versus JPMorgan is like comparing the value of the U.S. dollar to that of the Mexican peso. Lots of promise, a better future for growth on a relative basis and a long history of missteps that are not tied to any single person or group of people through time. stimates here are -$0.33 EPS and $18.43 billion in revenues.
Wednesday is the pinnacle day for banks reporting earnings. Bank of America (BAC) reports on Wednesday morning, and estimates are -$0.52 EPS and $26.84 billion in revenues. Warren Buffett’s favorite bank, Wells Fargo (WFC), is also on deck Wednesday. Estimates here are -$0.02 EPS and $21.88 billion in revenues. This is an added wild card for earnings season because of its TARP repayment. That added dilution will potentially be a factor in the earnings report. Also on Wednesday are the following large banks and brokerages:
- Bank of New York Mellon Corp. (BK) estimates are $0.51 EPS and $3.28 billion in revenues.
- Morgan Stanley (MS) estimates are $0.36 EPS and $7.81 billion in revenues.
- Northern Trust (NTRS) estimates are $0.66 EPS and $923.9 million in revenues.
- State Street Corp. (STT) estimates are $0.99 EPS and $2.17 billion in revenues.
- US Bancorp (USB) estimates are $0.29 EPS and $4.28 billion in revenues.
Goldman Sachs (GS) reports Thursday morning, and estimates here are $5.19 EPS and $9.75 billion in revenues. The top dog in the bulge bracket brokerage firms is always expected to exceed estimates, and this time should be no different. Since this firm is at the epicenter of huge bonus payouts, total compensation as a percentage of revenues will be a critical issue as that data will give a benchmark measurement for what politicians and regulators will use as a figure to criticize the firm for the weeks and months ahead.
After the closing bell on Thursday we have both American Express (AXP) and Capital One (COF). The good news here is that on Friday we started seeing better and better credit metrics after months of drawing down. That won’t make these immune to loss provision increases nor to revenue concerns of other more traditional banks and lenders, but it should at least offer some downside comfort. Estimates for American Express are $0.55 EPS and $6.13 billion in revenues. Estimates for Capital One are $0.45 EPS and $4.32 billion in revenues.
Prosperity Bancshares (PRSP) is not the only regional bank reporting this week (due Friday), but the Texas bank has been a classic example of what a regional and larger than community bank should strive for. Its losses have been kept to a minimum, and it has been praised by BizJournals.com via the Houston Business Journal; Morningstar also called it one of the favorite franchises in Texas. While many regional banks crashed, this one did so only on a very marginal basis compared to its peers. At $39.53, its 52-week trading range is $20.04 to $41.18 but this is effectively back to all-time highs. Estimates are $0.63 EPS and $93.97 million in revenues.
Another super-regional bank due Friday that has branches in many states is Huntington Bancshares (HBAN), yet this one has much exposure to the problem loans and its shares have not held up as well. With shares at $4.28, its 52-week range is $1.00 to $6.18 but it was north of $20 in 2007 and before that. Estimates are -$0.27 EPS and $638.68 million in revenues.
General Electric (GE) is also on deck for earnings this coming Friday. GE is a conglomerate by the classic sense, yet its woes were due to its financial operations in late 2008 and early 2009. Many still consider GE a bank, particularly in the financial services industry.
There are some issues to consider here on top of earnings, revenues and credit metrics. First and foremost, each estimate for each company this week, particularly those reporting earnings later in the week, will be slightly different than they are this long weekend after more and more peer earnings have been released. Second, options will be harder to use for future comparison because they will effectively have one full month’s worth of time value before expiration date. Perhaps the largest issue to consider will be that the 50-day moving averages in all of the major players are under the current prices even after the JPMorgan report. That level has been a significant pivot point since October, and there would seem to be a support as these stocks begin to challenge the 50-day moving averages, or if they challenge those levels.
The focus most traders and investors will be taking is one of “looking for diamonds in rough” and looking for buying opportunities. The market has effectively not really corrected more than 5% since the recovery started after March 9, 2009. Does it correct 10%? That won’t be known until it occurs, but if these continue to pull back then the bargain hunters may finally get an entrance they have hoped for. That being said, last week we saw stocks sell on bad news and on good news in earnings. Companies which have disappointing bottom- and top-line results would be the ones to avoid. If you can buy quality at a discount, chasing the junkier reports may be an amateur’s strategy.
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