Earnings season kicked off this week with reports from the likes of Lennar, KB Homes and Delta Airlines, but it was financial institutions such as JP Morgan and Wells Fargo that really kicked off the start of the earnings season. Both of these banking behemoths reported on Friday morning, and the results were somewhat split.
JP Morgan (NYSE: JPM) beat on both the top and bottom line. Trading revenue was down, but consumer and business banking revenue were up considerably as was commercial banking. Asset and wealth management revenue also grew, but not as much as the different banking divisions.
Wells Fargo (NYSE: WFC) beat on the EPS estimate, but missed on the revenue estimate. The company’s total loan balance moved up 0.5 percent after declines in three straight quarters. Revenues from community banking and wealth and investment management were up, but wholesale banking revenue declined.
While the recent economic changes with the tax overhaul and rising interest rates would have had little impact on the past quarter’s earnings, you can bet I will be paying close attention to the earnings coming out in the coming week. We will get reports from Citigroup (NYSE: C), Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS), US Bancorp (NYSE: USB), Bank of New York Mellon (NYSE: BK), and Morgan Stanley (NYSE: MS).
To give you an idea of what analysts are anticipating from this group, I put together the following table. This table shows how the EPS has been growing in recent years based on the EPS rating from Investor’s Business Daily and it shows the SMR Rating from IBD as well. These ratings show you how the company ranks in terms of sales growth, return of equity and profit margin. I also included the current consensus estimate for EPS and revenue.
We see from the EPS ratings that BAC, BK and MS are well above average while C, GS and USB are just slightly above average. None of these six financial institutions gets an A rating, but four of them earn a B rating in the SMR category. Looking at the three measurements that go in to the SMR rating, all six of these companies have really good profit margins, but on average they lag in return on equity and sales growth. The rising interest rate environment and the anticipated increase in merger and acquisition activity should help these companies grow their sales, but it won’t necessarily help with their return on equity.
When it comes to earnings announcements, it isn’t always about beating the estimates that matter, it is the reaction that matters. If the sentiment toward the stock is too bearish, the stock may rally even if the EPS and revenue numbers don’t beat estimates. If the sentiment is overly bullish, the stock may not rise even if the company beats on the EPS and revenue estimates.
With that in mind, I looked at the sentiment toward these six stocks. Citi and Goldman are both pretty neutral with their current sentiment readings. BAC’s sentiment is just slightly above average for the past year. The sentiment toward USB and Morgan Stanly is relatively high at this time and the sentiment toward BK is extremely high right now.
What these sentiment readings suggest is that Bank of New York Mellon is probably the most at risk of disappointing investors due to the extremely bullish sentiment. USB and Morgan Stanley are a little riskier than the others. Citi and Goldman have the least risk of disappointing, just because the sentiment is neutral.
Look at it this way, if everyone is bullish, the greater the chance that the results disappoint investors. If everyone is bearish, the greater the chance that the results impress investors.