Key bank earnings scheduled for release in the next few weeks will likely provide a better understanding of the sector’s near-term prospects. The banks will focus on the Fed’s decision to increase its benchmark federal funds rate in June for the sixth time since 2015. Moreover, the Fed hinted at one more rate hike in the second half and stated that it is likely to increase rates three times instead of two in 2019.
In this context, Wells Fargo & Company (WFC - Free Report) and Bank of America Corporation (BAC - Free Report) , which are scheduled to report on Jul 13 and Jul 16, respectively, assume greater significance. While, Wells Fargo holds a Zacks Rank #2 (Buy), Bank of America carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other major stocks reporting earnings on Jul 13 include Citigroup Inc. (C - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) .
Wells Fargo has gained 5.8% in the last three months and outperformed the broader industry that has moved down 2.4% over the same period. In comparison, Bank of America has not only underperformed the broader industry but also Wells Fargo, declining 5.8% over the same time frame.
Compared with the S&P 500, the industry is clearly undervalued. This implies that the industry has upside potential for the near future.The industry has an average 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 1.69, which is below the S&P 500’s average of 3.89. Hence, it might be a good idea to focus on stocks belonging to this particular industry.
Coming to the two stocks, both are less pricey than both the industry and the S&P 500. However, with a P/B ratio of 1.18, Bank of America is undervalued than competitor Wells Fargo, which has P/B ratio of 1.50.
Wells Fargo’s dividend yield over the last year is 2.82%, higher than the broader industry’s figure of 2.18%. With a dividend yield of only 1.72%, Bank of America shareholders earn a comparatively lower dividend yield than both its competitor and the broader industry.
Profitability ratios acquire greater importance in an industry characterized by interest income. Net margin is a good metric to compare the profitability of companies within the same industry, since they are bound by the same business constraints.
With a net margin value of 22.52%, Bank of America is slightly behind the industry average of 22.56%. With respect to profitability, Wells Fargo, with a net margin of 22.86%, is better placed than both Bank of America and the industry.
Earnings History, ESP and Estimate Revisions
Considering a more comprehensive earnings history, Bank of America has delivered positive surprises in all the four quarters with an average earnings surprise of 5.8%. On the other hand, Wells Fargo has delivered positive surprises in three of the prior four quarters, with an average earnings surprise of 0.7%.
When considering Earnings ESP, both Wells Fargo and Bank of America has ESPs of -0.09% and -4.89%, respectively. Bank of America’s earnings estimates for the current year have remained unchanged over the last seven days, while the same metric for Wells Fargo has increased by 0.2%.
Our comparative analysis shows that Bank of America holds an edge over Wells Fargo when considering valuations and earnings history. However, when considering price performance, net margin and dividend yield, Wells Fargo holds an edge over Bank of America.
When we take a more comprehensive look at the companies’ ESP and estimate revisions, Wells Fargo is the better stock. What clinches the case in favor of Wells Fargo at this point of time is that it has a better Zacks Rank than Bank of America. This is why it may be a good idea to bet on Wells Fargo over Bank of America as both prepare to report earnings in the coming weeks.
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