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Financial Sector Overview

7/14/2017
By Charles Payne, CEO & Principal Analyst

This is the kickoff of the earnings season, but many investors are hoping it’s the kickoff for financials to get it in front of the rally parade once again. Developments coming into this earnings period are positive, including the recent stress test (I know it’s a joke, but it unleashed a windfall on shareholders), and the Fed has a new mission of hiking even in the face of disinflation.

Of course, these banks should be healthy after the Fed spent trillions buying up debt that had no place to go other than perhaps Yucca Mountain. Hence, the dividend increases and announced share buybacks, and a spark in share prices will surely put a floor beneath them as well.

 

Peer to Peer

Stress Test Action

Dividend

Buy Back

Tier One

  Goldman Sachs

NA

NA

16.3

  JP Morgan

$0.56 +12%

$19.4 billion

12.4

  Morgan Stanley

$0.25 +25%

$5.0 billion

17.4

 

Even with the great news, the S&P Financial Sector ETF (XLF) is still having trouble breaking through a double top formation. The index is up 33% in the past 52 weeks, but only 7.7% in 2017.  It’s on the cusp of a major breakout that could have legs.

http://markets.money.cnn.com/cgi-bin/upload.dll/file.png?z768f7c0az5ee22747fe6744248a5b66e7e1fb4b10

From a valuation point of view, shares of all the big banks are changing hands with similar valuations. 

 

Peer to Peer

Valuations

Price to Book

Price to Earnings

Growth

Price to Book

  Goldman Sachs

11.3

1.02

1.3

  JP Morgan

11.7

0.99

1.2

  Morgan Stanley

11.7

0.99

1.2

 

Although execution in the most recent quarter varied with JP Morgan (JPM), it is struggling to keep up the pace of revenue growth.

 

Peer to Peer

Financial Execution

Revenue

Operating Margin

Earnings Per Share

  Goldman Sachs

+26.6

31.6/24.9

$5,15 +92%

  JP Morgan

+6.2%

25.2/22.9

$1.65 +22%

  Morgan Stanley

+25.0%

28.8/22.3

$1.00 +82%

 

What to Watch (current rating)

Goldman Sachs (GS) (Buy) missed on earnings last quarter after its margin of beating consensus edged lower over the prior year. The fixed income was a disappointment, and investment banking’s increase of 16.4% didn’t keep pace with its peers. There is much anticipation of a major hike in a dividend and a massive buyback announcement.

JP Morgan’s (Buy) strong investment banking and investment management masked the growing problem of these banks not having to lend to Main Street. However, mortgage banking was -18% and cards/auto was -3%.  Despite management, it still needs to find ways to expand operating margins (hopefully not at the expense of regular folks).

Morgan Stanley (MS) (Strong Buy) is best positioned for growth, which is tied to actually lending and has room to improve its wealth management business as well.

Charles Payne
Wall Street Strategies


 

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