As promised last Wednesday, here is the next installment of our Market 360 earnings series. Today, we’re focusing on banks and other financial institutions. But first, I want to close the loop on Alcoa (AA).
Alcoa was expected to post earnings per share of $0.23 on $5.85 billion in sales, and after the closing bell last Wednesday, the company reported third-quarter results that trounced analysts’ sales and earnings estimates. Compared with Q3 2013, net income skyrocketed 521% to $149 million, or $0.12 per share. Excluding special items (like a $202 million restructuring charge related to smelter and mill closures), adjusted earnings were $0.31 per share. Over the same period, net sales climbed 8% to $6.24 billion.
This was a strong report, and Alcoa is expected to keep up the momentum, as the company is maintaining its 2014 forecast of 7% growth in global demand for aluminum. This was a great way to start the third-quarter earnings season and bodes well that we’ll see even more positive earnings surprises in the coming weeks.
Now as I mentioned briefly last week, I used to be a banking analyst and have advised my subscribers and management clients to largely avoid financial stocks for years. Since the financial crisis of 2008, I’ve stressed it even more.
And during earnings season, I definitely read their financial results with a wary eye. Ever since the 2008 financial crisis, Wall Street tends to overreact to financial stocks. As a result, any weakness impacts the broader market. That’s why it’s imperative that we understand what to expect from bank stocks this earnings season.
Earnings Spotlight: Wells Fargo & Company
Wells Fargo & Company (WFC) announced third-quarter financial results prior to the market open this morning. I was paying particular attention to WFC’s announcement this morning, as the company has posted a positive earnings surprise or in-line earnings for the past four quarters.
For the third quarter, Wells Fargo noted that its profit increased 1.7%, thanks in part to a more stable mortgage business. It reported net income of $5.41 billion, or $1.02 per share, which is up from $5.32 billion, or $0.99 per share. Overall, revenue increased 3.6% to $21.21 billion.
The consensus estimate was for $1.02 earnings per share on $21.1 billion in sales. So Wells Fargo posted in-line earnings and slight sales miss.
Other numbers worth noting… Wells Fargo’s loan portfolio increased 3.7% to $838.9 billion in the third quarter, thanks to 13% growth in commercial and industrial loans. And mortgage lending increased by $1 billion to $48 billion in the quarter.
Currently, Wells Fargo garners an A-rating from Portfolio Grader. So if you’re looking to pick up a financial institution, Wells Fargo could be a good choice.
Financials’ Earnings Scorecard
JPMorgan Chase & Co. (JPM) also posted third-quarter financial results before the market open today. The bank reported earnings per share of $1.36 on $24.25 billion in sales. Analysts were looking for $1.38 earnings per share on $24 billion in sales. So JPM miss earnings estimates by two pennies and posted a slight sales beat. Shares are down this morning, and are trading about flat for the year. I would be wary of this C-rated stock.
Citigroup Inc. (C) announced that net income climbed 6.5% to $3.44 billion, or $1.07 per share, up from $3.23 billion, or $1 per share, in Q3 2013. Revenue increased 9.5% to $19.6 billion, or $19.98 on an adjust basis. The consensus estimate was for $1.12 earnings per share on $19.04 billion in sales, so Citigroup missed estimates by 4.7% and posted a 4.9% sales surprise. While the bank also announced restructuring plans (exiting consumer operations in 11 more countries) to better align its business, I would avoid this D-rated stock.
Upcoming Financials’ Calendar
Wednesday, October 15
Bank of America Corp. (BAC)—This bank is hurting; to say the least. It has posted two negative earnings surprises back-to-back, to the tune of a 117% miss on average. And even worse, analysts have revised their estimates from $0.32 per share to a $0.09 per share loss in the past 90 days. Avoid.
American Express Co. (AXP)—Analysts have stayed steady with their estimates for AXP, looking for $1.36 earnings per share on $8.35 billion and making no revisions in the past 90 days. But the company earns a C-rating from PortfolioGrader, so I would advise watching the earnings report with a wary eye.
Thursday, October 16
BB&T Corp. (BBT)—BB&T has been expanding its reach, purchasing branches from Citibank and acquiring the Bank of Kentucky in the past few months. While this may eventually add to company’s bottom line, the outlook for the near term isn’t rosy. Analysts have revised estimates lower for the third and fourth quarters, as well as full-year 2014 and 2015.
Capital One (COF)—This financial giant beat analysts’ estimates in the past two quarters, and currently earns a B-rating. Earnings are only expected to grow 3.8% in the third quarter, while sales are forecast to fall 1.6%.
Fifth Third Bancorp (FITB)—In the past three months, analysts have revised estimates lower for both the third and fourth quarters. Never a good sign. Watch out for this C-rated stock.
Goldman Sachs (GS)—If you own any shares of Goldman Sachs, I suggest you watch its earnings report carefully. While analysts have recently lifted their estimates for the company, it earns an overall C-rating from Portfolio Grader due to its poor sales (D-rating) and earnings growth (C-rating).
Friday October 17
Morgan Stanley (MS)—Shares of this investment bank have been slowly climbing their way back to prost-crisis levels. While it’s touting a safer business model that’s more dependent on its retail broker, I’m not buying due to its overall C-rating and fat F-rating for earnings momentum.
In the October 16 edition of our Market 360 earnings series, we’re going to focus on Aerospace and Defense stocks, which are also big dividend plays. Stocks in this sector have produced some mouthwatering gains this year—and I want to advise you on which ones are the best bets for your money and which you should avoid.
Next week, some of the biggest names in the industry will be reporting financial results, including Lockheed Martin (Tuesday), Northrop Grumman (Wednesday) and Raytheon (Thursday). So be sure to tune back in on October 16 when we’ll preview these upcoming reports.
*Please note that earnings dates can change. All expected earnings dates mentioned are accurate as of the publishing date.