Back to top

Image: Bigstock

JPM vs. WFC: Which is the Better Bank Stock Ahead of Earnings?

Read MoreHide Full Article

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.

Price Performance

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.

 

Valuation

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.   

Dividend Yield

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%.

Conclusion

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.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

Published in