Earnings Audits on Wells Fargo, JPMorgan, Citi

Today, we’re focusing on banks and other financial institutions, but first, I want to close the loop on Alcoa (AA).

Alcoa was expected to post earnings per share of $0.23 on $5.85 billion in sales. After the closing bell last Wednesday, Alcoa reported third-quarter results that trounced analysts’ sales and earnings estimates. Compared with Q3 2013, net income skyrocketed 521% to $149 million, or $0.12 per share. Excluding special items (like a $202 million restructuring charge related to smelter and mill closures), adjusted earnings were $0.31 per share. Over the same period, net sales climbed 8% to $6.24 billion.

This was a strong report, and Alcoa is expected to keep up the momentum, as it is maintaining its 2014 forecast of 7% growth in global demand for aluminum. This was a great way to start the third-quarter earnings season and bodes well that we’ll see even more positive earnings surprises in the coming weeks.

Now, I used to be a banking analyst and have advised my subscribers and management clients to largely avoid financial stocks for years. Since the financial crisis of 2008, I’ve stressed it even more.

During earnings season, I definitely read their financial results with a wary eye. Ever since the 2008 financial crisis, Wall Street tends to overreact to financial stocks. As a result, any weakness impacts the broader market. That’s why it’s imperative that we understand what to expect from bank stocks this earnings season.

Earnings Spotlight: Wells Fargo & Company

Wells Fargo (WFC) announced third-quarter financial results prior to the market open this morning. I was paying particular attention to WFC’s announcement this morning, as Wells Fargo has posted a positive earnings surprise or in-line earnings for the past four quarters.

For the third quarter, Wells Fargo noted that its profit increased 1.7%, thanks in part to a more stable mortgage business. It reported net income of $5.41 billion, or $1.02 per share, which is up from $5.32 billion, or $0.99 per share. Overall, revenue increased 3.6% to $21.21 billion.

The consensus estimate was for $1.02 earnings per share on $21.1 billion in sales. So, Wells Fargo posted in-line earnings and slight sales miss.

Other numbers worth noting…Wells Fargo’s loan portfolio increased 3.7% to $838.9 billion in the third quarter, thanks to 13% growth in commercial and industrial loans. And mortgage lending increased by $1 billion to $48 billion in the quarter.

Currently, Wells Fargo garners an “A” from Portfolio Grader. So if you’re looking to pick up a financial institution, Wells Fargo could be a good choice.

Financials’ Earnings Scorecard

JPMorgan Chase (JPM) also posted third-quarter financial results before the market open today. JPMorgan reported earnings per share of $1.36 on $24.25 billion in sales. Analysts were looking for $1.38 earnings per share on $24 billion in sales. So, JPM miss earnings estimates by two pennies and posted a slight sales beat. Shares are down this morning, and are trading about flat for the year. I would be wary of JPMorgan as it is a “C-rated” stock.

Citigroup (C) announced that net income climbed 6.5% to $3.44 billion, or $1.07 per share, up from $3.23 billion, or $1 per share, in Q3 2013. Revenue increased 9.5% to $19.6 billion, or $19.98 on an adjust basis. The consensus estimate was for $1.12 earnings per share on $19.04 billion in sales, so Citigroup missed estimates by 4.7% and posted a 4.9% sales surprise. While the bank also announced restructuring plans (exiting consumer operations in 11 more countries) to better align its business, I would avoid this “D-rated” stock.


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