In Tuesday's column, we discussed the strong earnings period that most financials have been enjoying, reinforcing our bullish view on the group. We reviewed and re-endorsed four recommendations MetLife (MET), Morgan Stanley (MS), State Street (STT) and Wells Fargo (WFC).
Today, we will highlight three more financial stocks that have had good quarters, enjoy strong prospects going forward and are selling at attractive valuations: BB&T (BBT), JPMorgan Chase (JPM), and Charles Schwab (SCHW).
BB&T reported much better-than-expected results for the quarter, led by 6% loan growth, with core earnings of $0.68 vs. the $0.58 estimate. The company said business accelerated in many of its major markets. Analysts subsequently raised 2012 EPS estimates by $0.10. At Thursday's closing price of $32.49, BBT trades for 12.3x 2012's depressed EPS of $2.64. The company is currently suffering from one-time elevated credit losses and various merger integration expenses. Based on more normal returns on assets and equity, we believe BBT should earn more than $3.75 in 2014. BBT has historically traded at a premium to the group's 12x to 13x earnings.
JPMorgan reported very strong operating results for the quarter of $1.31 vs. estimates for $1.19. Results were led by strong fee income generation in mortgage banking, credit card charge volumes and investment bank trading. At Thursday's closing price of $43.80, JPM trades for just 8.8x 2012's EPS of $4.96. JPMorgan has historically traded at 10.5x earnings. Most analysts expect normalized earnings of $6.50 per share in the next cycle. JPMorgan also announced more aggressive dividend and capital return policies to investors versus its major peers. The firm is still suffering from elevated credit losses and one-time litigation expenses that have held back the stock. As these items become a thing of the past and earnings continue to ramp up, we believe this stock has significant upside potential.
Finally, Schwab reported in-line revenues and earnings for the quarter. The company continued to gain market share with strong new account openings and record assets under management. Unfortunately, the zero-interest-rate Federal Reserve policy is costing Schwab more than $600 million, or $0.50 per share, in annual money-market-fund fees and net-interest-income spreads. At the most recent closing price of $14.34, Charles Schwab trades for approximately 12.5x normalized earnings. Over the next few years, we expect earnings to grow from 2012's $0.70 per share to well over $1.25 to $1.40, resulting in a much higher stock price.
Again, we believe that focusing on financial stocks is quite timely. After several years of dismal stock performance, fundamentals have turned positive and stock prices are expected to follow, resulting in very strong absolute and relative returns in upcoming periods.
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