The big banks on Wall Street have just kicked off the latest round of earnings reports; here, money manager and value investor John Buckingham, and editor of The Prudent Speculator, reviews the results from three leading investment banks.
Q1 financial results came in shy of analyst expectations. at JPMorgan Chase (JPM). America’s largest bank earned $2.63 per share (vs. $2.72 est.), a substantial swing compared to EPS of $4.50 in the year-ago period, but it is worth noting that $4 billion of loan loss reserves were released (to the benefit of EPS) in Q1 2021.
This time around, JPM added $902 million (subtracting $0.23 from EPS) to its reserves in the latest quarter, reflecting its view of a higher probability of downside risks due to high inflation and the war in Ukraine, and for Russia-associated exposures.
JPM remains a favored holding in many of our diversified portfolios, and management was upbeat regarding loan demand for the year ahead, even as several previously noted risks sit on the horizon.
We continue to like the multiple levers available to generate fee revenue in varying environments, and we maintain our fondness for Mr. Dimon, who is willing to take a long-term view, spending on enhancing various capabilities, even if there is limited near-term payoff. Shares trade for less than 11 times the consensus EPS estimate for FY 2022 (nearly 60% of the market multiple) and the dividend yield is 3.2%. Our Target Price for JPM is presently $184.
Goldman Sachs (GS) earned $10.76 per share in Q1, well below the $18.60 in the year-ago period, but roughly even with Q4. Following the 7% overshoot last quarter, Street analysts went with the "under" this go-round as estimates were some 20% below the actual print.
After a blockbuster 2021, this year is likely one of normalization for parts of the business, but as with other major diversified financial giants, lagging performance from one segment has generally been offset by the stronger performance of another. Goldman’s equity underwriting came to a virtual stand-still in Q1, but the $7.9 billion generated by the firm’s trading business more than offset the miss. In addition, net interest income has grown each quarter since bottoming in Q2 2020.
The shares have shed nearly a quarter of their value since the 52-week high was set last November. With Goldman earning over 15% on tangible equity, we find the stock cheap, trading for a single-digit multiple of the consensus 2022 EPS estimate and just above tangible book per share. And even though projections have fallen somewhat in recent months, we wouldn’t rule out $40 of EPS for 2022, which would make the stock even more attractive.
We continue to like the healthy balance sheet and ongoing sound strategic repositioning. The build-out of its traditional banking and investment management businesses should serve shareholders well in the long run as management attempts to evolve the trading and deal-making titan into a more well-rounded financial firm with more stable consumer and commercial businesses. The dividend yield is 2.5% and our Target Price is now $462.
Morgan Stanley (MS) posted Q1 EPS of $2.06, a 7% decline from the same period a year ago, but more than 50% higher than the pre-pandemic number. The bank was just shy of its return on tangible equity goal of 20% as investment banking fees ebbed. Fed by market volatility, the trading department led the way in the quarter, earning over $6 billion. Wealth management income bounced back from Q4 despite a pullback in equities and fixed income.
We continue to like the diversifying acquisitions of Eaton Vance and E*Trade, which we believe give MS greater scale in tech, a deeper product and service base, and self-directed investors to complement advisor-assisted wealth-management clients.
In the near term, we think capital market activities will resume throughout the year, while MS is likely to benefit from higher rates in a meaningful way and we see the opportunity for the firm to take larger wallet share in wealth management. Shares trade for 11 times EPS estimates and offer a dividend yield of 3.3%. Our Target Price remains $120.