J.P. Morgan Preview, Huge Bank Sector Book Value Discounts On Deck (JPM, WFC, BAC, C, STT, BK, MS, GS, AXP, COF, FAS)

J.P. Morgan Chase & Co. (NYSE: JPM) is about to report earnings Friday morning as the first bank and second DJIA component kicking off earnings season.  We wanted to make a preview on Jamie Dimon’s company as well as to highlight some of the discounts to book value and other color on rival banks as they are all likely to react to Friday’s news.

We will be paying extra attention to the money center banks of Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C), and Wells Fargo & Co. (NYSE: WFC); and then there are the “bankless bank holding companies” of Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) to consider as rival trading outfits.  Then there is also American Express Co. (NYSE: AXP) with much of the same client base as Chase Banks and then the more mainstream Capital One Financial Corporation (NYSE: COF) to consider as well. On the trust bank side and fiduciary side, there is Bank of New York Mellon Corporation (NYSE: BK) and State Street Corporation (NYSE: STT).

We have added in color on each group as well as shown trading ranges, implied price targets, and the implied discounts to the stated book values.

J.P. Morgan Chase & Co. (NYSE: JPM) is the best of the large diversified money center banks to most investors and it still trades at 0.76-times its stated book value.  The stock is at $36.35, the 52-week range is $27.85 to $48.36, and the consensus analyst price target objective is $46.29. Thomson Reuters has estimates of $0.91 EPS and $23.05 billion in revenues for the quarter.  Keep in mind that estimates have ticked lower almost each week during the last quarter.

Bank of America Corp. (NYSE: BAC) was recently listed as being at well under 0.5-times book value, but the stock has been the top performing DJIA stock.  With shares at $6.87, the 52-week range is $4.92 to $15.31. The consensus target is $9.02.

Citigroup Inc. (NYSE: C) was recently about 0.52-times stated book value. Shares are trading around $31.27 with a 52-week range of $21.40 to $51.50 and the consensus price target is $41.98.

Wells Fargo & Co. (NYSE: WFC) was recently trading at 1.1-times book value, making Warren Buffett’s favorite bank stock the only of the money center banks not at a discount to its stated book value.  That is partly because the new trading rules and regulations are believed to have the least impact on it out of the money center banks.  Shares are trading around $29.62 with a 52-week range of $22.58 to $34.25 and the consensus price target is $32.37.

Goldman Sachs Group Inc. (NYSE: GS) trades at about 0.7-times its stated book value and some now expect a loss when it reports earnings.  At $99.76, the 52-week range is $84.27 to $175.34 and the consensus price target is $128.80.

Morgan Stanley (NYSE: MS) trades at a steep discount even to Goldman Sachs with a price/book ratio of only about 0.52-times stated book.  Shares trade at $17.10 and the 52-week trading range is $11.58 to $31.04.  The consensus price target is currently about $21.80.

American Express Co. (NYSE: AXP) is not at a discount to book value at all at 3.19-times book value because it is classified in such a different manner.  Shares are trading at $48.95, the 52-week range is $41.30 to $53.80, and the consensus price target is $56.63.

Capital One Financial Corporation (NYSE: COF) may not be accurate on book because of the acquisitions and changes there.  It is stated as being 0.75-times its stated book value.  Shares trade at $47.71, the 52-week range is $35.94 to $56.26, and the consensus price target is $56.85.

Bank of New York Mellon Corporation (NYSE: BK) trades at 0.77-times its stated book value at the custodial and fiduciary bank. Shares are at $21.50, the 52-week range is $17.10 to $32.50, and it has a price target of $25.33.

State Street Corporation (NYSE: STT) is at a premium of 1.08-times its stated book value for the custodial bank.  State Street;s stock is at $43.05, its 52-week range is $29.86 to $50.26, and the consensus price target is $47.36.

Price-to-book and price-to-earnings data provided by Finviz.com, consensus price target (mean target) provided by Thomson Reuters.

Many estimates have been trimmed by analysts of late for the banks and financials.  We still expect modest credit metric improvements in most of the big banks and more importantly expect improvements in customer credit metrics to have improved again.  The difference this quarter is that there should be a tick up in loan demand actually being met by the banks, but don’t expect any huge gains there.

Before you get too excited about the discounts to book value, this may still be more of a ceiling rather than a floor.  Cash may have to be paid out in settlements, carrying cash balances yields literally nothing, and many banking operations remain in a state of muted flux.

Lastly, look for this to impact the wild triple-leverage ETF of the Direxion Financial Bull 3X Shares (NYSE: FAS), but watch the tracking error when the markets are not open.

JON C. OGG