Starting tomorrow, quarterly results from major banks will kick-off the first quarter earnings season. The resurgence of dormant volatility due to trade war tensions, technology industry woes and inflation will certainly drive trading revenues. A tighter rate environment will also boost net interest margins.
Banks are the biggest earnings contributors of the Finance sector. The sector’s earnings outlook has notably improved as a result of tax cuts, higher interest rates, and generally favorable economic backdrop. The sector is expected to report 19.2% higher earnings on 4.5% higher revenues, which will follow the sector’s flattish performance in the preceding period. (Read: Bank Earnings in the Spotlight)
Major banks reporting earnings this week include Citigroup Inc. (C - Free Report) and The PNC Financial Services Group, Inc. (PNC - Free Report) . With JPMorgan Chase & Co. (JPM - Free Report) and Wells Fargo & Company (WFC - Free Report) scheduled to report on Apr 13, this may be a good time to consider which of these is a better stock. Both of these have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Return on Assets (ROA)
Examining earnings per share alone would not generate any significant insights when determining the level of profitability of a bank. Return on Assets is a ratio which reveals how efficiently a bank is utilizing its assets to generate profits.
Currently, JPMorgan holds total assets of $377.3 billion while Wells Fargo has total assets of $253.2 billion. Our research shows that the average one year trailing 12-month ROA for Wells Fargo stands at 1.14%, higher than 1.05% for JPMorgan.
JPMorgan has lost 1.8% over the last three months, outperforming the broader industry which has declined 7.1% over the same period. Wells Fargo has dropped 17% over the same period, underperforming both the broader industry and JPMorgan.
Compared with the S&P 500, the broader industry is undervalued. This implies that the industry has the potential to gain in the near future. The industry has an average one year trailing 12-month P/B ratio – which is the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next – of 1.76, which is below the S&P 500 average of 3.74. Hence, it might be a good idea not to stay away from stocks belonging to this industry.
Coming to the two stocks under consideration, with a P/B ratio of 1.39, Wells Fargo is undervalued compared to the S&P 500 and the industry. However, though JPMorgan is also undervalued compared to the industry and the S&P 500, with a P/B ratio of 1.65, it is pricier than Wells Fargo.
Wells Fargo’s dividend yield over the last one year period is 3%. With a dividend yield of 2.03%, JPMorgan shareholders earn lower dividend yield than both Wells Fargo and the broader industry, which has an average dividend yield of 2.06%.
Earnings History and ESP
Considering a more comprehensive earnings history, JPMorgan has delivered positive surprises in all the prior four quarters with an average earnings surprise of 8.7%. In comparison, Wells Fargo has delivered positive surprises in three of the four prior quarters with an average earnings surprise of 0.3%. But the situation changes when considering Earnings ESP values, with JPMorgan's being +0.29% and Wells Fargo’s being +0.73%.
Our comparative analysis shows that JPMorgan holds an edge over Wells Fargo when considering price performance and a more detailed earnings history. However, Wells Fargo is superior when considering valuation, return on assets and dividend yield.
Additionally, it carries an ESP reading of +0.73%, better than JPMorgan’s figure of +0.29%. Both stocks have a Zacks Rank #3 and seem to be evenly matched but Wells Fargo is preferable ahead of earnings, since it holds a clear edge in the Earnings ESP stakes.
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