Take these Values to the Bank: JPMorgan, BofA, Citi and Goldman Sachs

02/04/2020 5:00 am EST

Focus: FINANCIALS

Chris Quigley

Contributing Editor, The Prudent Speculator

We retain our enthusiasm for the long-term prospects of equities in general, and our broadly diversified portfolios of what we believe to be undervalued stocks in particular, notes Chris Quigley, contributing editor to The Prudent Speculator.

JPMorgan Chase (JPM) — the nation’s largest bank — released another solid earnings report, carrying its momentum through year end. The bank earned $2.57 per share against $2.36 of expected earnings, supported by average deposit growth of 7% year over year.

JPM continues to earn solid returns on its capital, producing a 17% ROTCE in Q4 and 19% for the full fiscal year, even while maintaining a robust common equity capital ratio of 12.4%. We remain quite fond of the bank’s fortress balance sheet and the overall business model under CEO Jamie Dimon’s guidance.

We believe that the deepening budget for investment in technology enabled through existing scale and diversification of revenue sources creates a virtuous circle for the financial behemoth and that the bank will continue to operate at a high level for the foreseeable future.

The shares are currently trading for just 12.8 times next 12-month  projections, while carrying a dividend yield of 2.6%. Our Target Price for JPM has been elevated to $155.

Diversified financial firm Bank of America (BAC) reported another solid quarter as adjusted Q4 EPS came in at $0.74, versus consensus estimates of $0.69. The quarter benefited from a 4% increase in average loan growth, continued positive operating leverage and strong asset quality, with credit charge-offs remaining low. The consumer bank grew average deposits 5%.

The bank’s trading and securities services saw a material improvement in results, and Merrill Lynch realized 25% more net new households than it did in 2018. BAC’s efficiency ratio came in at 59%. Credit quality remains solid and the stock is trading for 11.4 times next 12-month estimated EPS.

We continue to be fans of BAC and see it as one of our core financial holdings. While there will continue to be near-term pressure on net interest margin in this low rate environment, we see numerous long-term opportunities, from its large deposit base and consumer lending franchise to its “thundering herd” of Merrill Lynch’s financial advisors and wealth managers. Our target has been inched up to $44.

Diversified bank Citigroup (C) reported adjusted Q4 EPS of $1.90 (vs. $1.84 est.). Revenue for the period also came in better than forecasts ($18.38 billion vs. $17.88 billion est.), growing a better-than-expected 7%.

With improving operational execution and business lines in faster growth markets around the globe (vs. its U.S. business), offset by headwinds from the potential for lower interest rates for longer, we believe that Citi shares offer investors more upside, despite an extremely strong 2019.

The stock is priced at just 9.4 times next 12-month  adjusted EPS expectations and 98% of book value. We continue to see a more focused and recapitalized Citigroup as prepared to reward investors over the long-term.

We like that Citigroup has good leverage towards the solid U.S. economy, while also having the potential to show outsized benefits versus its peers from growth in Asia, Latin America and other emerging economies.

Even though the company faces plenty of operational hurdles in different segments of its business, we think the bank is on its way to achieving its low-50s efficiency-ratio target by end of 2020. Our target price has been bumped up to $109.

Investment banking and securities firm Goldman Sachs Group (GS) posted Q4 revenue 16% higher than expected led by trading and asset management.

Despite the strong top-line results, adjusted earnings per share of $4.69 fell well short of expectations ($5.52) because of materially elevated litigation costs and expenses (much of it the hit coming from the scandal around 1MDB, a Malaysian development fund).

Capital ratios and book value increased year-over-year, while Q4 ROE was muted at 9%, materially impacted by the litigation charge, though full-year adjusted ROE was healthy at 12%.

The firm ranked #1 in worldwide announced and completed mergers and acquisitions for the year and also ranked #1 in worldwide equity and equity-related offerings and common stock offerings for the year.

We continue to be long-term fans of GS, and given the strong revenue trends, improving macro backdrop, strategic repositioning towards growth, an improving efficiency ratio and active capital management, we believe the company can achieve stronger growth, operating leverage and a potentially higher multiple than the current forward P/E of 10.

The ultimate goal of Goldman’s evolution is to change the trading and deal-making titan into a more well-rounded financial firm with more stable consumer and commercial businesses.

That said, we won’t be surprised if it takes a few years for the efforts to begin to be truly rewarded by investors. Our target price now stands at $292.

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