Big Banks Are A Value Trap

by Michael Bigioni

Many people are hesitant to reinvest in banking stocks because of the deep loses they suffered in the global recession, but are there good deals out there ready to be had? In this article, I analyze the major commercial banks. My actionable analysis concludes that the big, money-center banks are a value trap.

Citigroup Inc. (C) is trading at around $28, much lower than its 2007 highs of a split-unadjusted price of $550. The financial services company suffered severe losses in 2008 and dropped in size and rank from being one of the largest financial institution in the world to being ranked 23 by the Bankers Almanac. By comparison, JPMorgan Chase and Co's (JPM) stock price has had a much wilder ride going from highs of around $52 in 2007 to lows of under $16 in 2009 only to climb back up to more than $45 in 2011. The stock now trades around $33 and the company itself has gone from being in the top 3 for largest financial institutions in the world to being ranked number 10 by the Banker's Almanac. Bank of America (BAC), which was once the largest bank in the world, is now placed in 17th spot by the Bankers Almanac. After lows of near $3 in 2009, the stock climbed steadily to prices over $18 in 2009 and 2010 only to retreat back to around $3, where it currently trades around $28 on a split-adjusted basis. Note that Citigroup issued a 1:10 reverse stock split in May 2011.

Many analysts feel C is a buy, putting a target price of $44-45 on the stock, a difference of $16-17 or approximately 57%. Its 52-week range is $21.40 - $51.50 and the 50 and 200 day moving averages are 28.73 and 34.21 respectively. The company still has difficult statistics to work through. Revenue is estimated at $65.8 billion (ttm), down from $86.6 billion in December 2010. Earnings per share are estimated at $3.75 (ttm), up from $3.50 in december 2010. Analysts are predicting revenue to come in at $80.17 billion for December 2011, down by around 7%. Earnings are expected to increase from $3.50 to $4.08, however, indicating that Citigroup may be in better control of their costs. Analysts predict earnings to continue to grow in 2012 hitting $4.44 while minimal growth is expected for revenue. Return on equity is around 6.5%. Market capitalization is around $80.6 billion while real value of C is estimated at -$33.7 billion. While there are some positive aspects to the company, it is no where near as healthy as it was once perceived.

Analysts are putting a target price of $47 on JPMorgan Chase & Co. (JPM) which is 42% higher than where it is currently trading. Most are giving the stock a buy or strong buy rating. Its 52 week range is $27.85-$48.36 and the 50- and 200-day moving averages are 32.75 and 37.46 respectively. The company still has inconsistent statistics to work through. Revenue is estimated at $93.4 billion (ttm), down from $104.8 billion in 2010 and earnings per share are estimated at $4.69 (ttm), up from $3.96 in 2010. Analysts are predicting 2011 revenue to come in higher at $100.3 billion, but still under 2010 figures. They also expect 2011 earnings to increase $4.58, up from 2010. While revenue is expected to decrease, JPM is still managing to increase its earnings. Analysts predict earnings to continue to grow in 2012 hitting $4.93 while a slight decrease is expected for revenue. Return on equity is around 11%. Market capitalization is around $122 billion while real value of C is estimated at -$34.5 billion. There are some positive aspects to the company, but it is still a risky stock in my opinion.

Analysts have a target price of $9 on Bank of America (BAC), which is about 50% higher than where it is currently trading. Most are giving the stock a hold or buy rating. Its 52-week range is $5.13-$15.31 and the 50 and 200 day moving averages are 6.37 and 8.77 respectively. The company has different strengths than C and JPM. Revenue is estimated at $75.36 billion (ttm), down from $110.2 billion in 2010 and earnings per share are estimated at -$0.31 (ttm), down from $0.86 in 2010. Analysts are predicting 2011 revenue to come in higher at $93.32 billion, but still under 2010 figures. They expect 2011 earnings to be -$0.03, still well down from 2010. Both revenue and earnings are expected to take sharp drops this year while both are predicted to grow in 2012 with earnings expected to come in at $1.00 and revenue is expected to climb to $97.4 billion. Return on equity is around -0.78%. Market capitalization is around $61 billion while real value of C is estimated at $200 billion. There is a positive valuation to the company, but it disappoints this year with negative earnings. On the upside, 2012 should see a turn around.

Points to consider:

• C and JPM overvalued according to market cap and estimated value while BAC is under valued.
• Revenue is expected to be down for all 3 banks, while C and JPM are still expected to post increased earnings per share. BAC is expected to post a loss.
• All 3 banks are expected to improve earnings for 2012 while only BAC is expexted to increase earnings significantly.
• All 3 banks are well under their target price, but analysts are mixed on recommendations giving JPM their strongest backing.

Compared to the Toronto Dominion Bank of Canada (TD) which trades at around $70 and has a target price of near $93, the big 3 American banks look less stable. TD has consistently posted increased revenue and earnings while also increasing their presence in the United States. The company does have a negative estimated value at around -$37.7 billion versus a market capitalization of near $62.9 billion. For those who like dividend paying stocks, TD's trailing dividend was $2.47 and is expected to increase. By contrast, BAC's trailing dividend is $0.04 while JPM's is $0.80 and C's is $0.03. Looking at banking stocks, I am not interested in investing in American banks at these prices. TD looks a lot more appealing to me because of strong financials, good dividends and the fact that they are growing as opposed to recovering from poor management and a financial crisis. As always, these are my opinions so make sure to do your own due diligence before investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.