US pre-mkts: Bank earnings strong, Cat upgrade

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Investments

Very strong bank earnings coming through this morning – JPM led the way yesterday and the latest numbers from peers also look strong. Real good signs of improving loan growth in particular is a positive for BAC.

US pre-market key pointers

Bank of America (BAC)

Strong performance from Bank of America.

  • Net income of $7.7bn, EPS of $0.85 vs $0.71 expected
  • Revenues up 12% year-on-year – JPM was just up 2.2%
  • Net interest income up 10% to $11.1bn – most rate-sensitive of the big banks
  • Record M&A activity – Noninterest income up 14% to $11.7bn, driven by record asset management fees, strong investment banking revenue and higher sales and trading revenues
  • Expenses down on the quarter, flat on the year
  • $624m clawback from bad loan provisions – bottom line flattered less than the JPM numbers.
  • Stock up pre-mkt to tune of 2.5%, having fallen 0.92% yesterday in sympathy with JPM, which is trading mildly higher in pre-mkt.

Wells Fargo (WFC)

Wells Fargo results showed:

  • Net income of $5.1bn, EPS $1.17 vs $0.98 expected
  • Net interest income was down 5%, due to lower loan balances that reflect soft demand, also higher prepayments, lower yields
  • Results include $1.7bn decrease in credit loss provisions – equivalent to $0.30 per share.
  • Pre-mkt trades +1%, having slipped 1.3% yesterday.

Meanwhile, ahead of the cash open on Wall Street, US futures indicate all the major averages will open higher. SPX seen opening up 30+pts at just under 4,400, Dow Jones +200pts at 34,610, NDX at 14,900. Risk looking solid.

  • Walgreens Boots Alliance reported earnings $1.17, vs $1.02 expected, revenues $1bn ahead of expectations, cost-cutting programme a year ahead of schedule. US comparable sales up 8.1% from a year before.
  • UnitedHealth shares +2% pre-mkt after reporting earnings beat and raised guidance.
  • Caterpillar +1% pre-mkt, bouncing of its weakest level since Jan, as Cowen advises clients to buy ahead of the first ‘megacycle’ in 14 years, initiates with ‘Outperform’ rating and PT of $241.
  • Tesla shares are up pre-mkt to their best level in 7 months.
  • Boeing down 1% pre-mkt after report says co. dealing with new Dreamliner defect, production problems
  • FTSE 100 at HOD just a whisker under 7,200
  • Dollar continues to struggle. GBPUSD making a fresh 3-week high at 1.37334.
  • Gold also trades at HOD at $1,800, sitting on its 100-day SMA.
  • Treasury yields lower, 10s at 1.532%

Earnings season: five stocks on Goldman’s radar

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Investments

Earnings season is underway. Now’s the time to take a look at some stocks that could provide investors with more than the Wall Street consensus would tell you.

US earnings season Q3 2021

Goldman reviews earnings season stocks

Sometimes investors like to break away from the pack. To dare is to do.

It’s all about spotting opportunities from stocks that may be overlooked by Wall Street.

As reported by CNBC, Goldman Sachs has been scanning Wall Street for stocks it believes hold promise for investors looking for something different this earnings season.

Earnings season began in earnest this week with major US banks leading the charge as always. You can use our earnings season calendar to see which megacaps are reporting this quarter and when.

In a note to investors published on Wednesday, Goldman said it expects stocks to rise 6% this quarter. Its spotlighted stocks, however, could offer upsides of 14%.

The investment bank deployed a fairly complex methodology when analysing Q3 2021 earnings season stocks. 1,000 companies in Goldman Sachs’ coverage universe were scanned at the 25 best opportunities were selected when considering EPS of $5 per share over the next four quarters.

After this, the results were filtered through analysts which were above or below Thomson Reuters’ consensus for the upcoming quarter, and the year ahead, “on a key financial metric.”

“Single stock put-call skew is at its highest level in over a year,” Goldman said, encouraging investors to make out-of-money calls on its out-of-consensus stock picks. “Given investors are well hedged, even modest earnings beats are likely to drive a relief rally in specific stocks (on earnings day) and the broad index (over the next three months).”

The out-of-consensus stocks to pick

Please note these are only Goldman Sachs’ recommendations – not hard and fast must-buys. Only invest if you are comfortable with the risk of potential capital loss.

The top five stocks Goldman has selected to watch this earnings season are:

  • Uber
  • Signature Bank
  • Yeti
  • Bank of America Corp
  • Lowe’s

Let’s start with Uber. The ride-hailing service burst onto the scene several years ago as a taxi industry disruptor. Goldman’s Eric Sheridan thinks the app can deliver a 37% upside over the coming year. Sheridan’s earnings estimates put Uber 20% higher than Wall Street consensus right now too.

The idea is that if Uber can close the supply/demand gap, then this should lead to normalised ride pricing, higher demand in general, and thus pre-pandemic profits.

Outdoor retailers Yeti could offer even better upsides than Uber. Goldman considers Yeti a “growth compounder with best in class authentic brand positioning.” It could deliver upsides of 44% if Goldman is on the money. In terms of EPS, Yeti’s could be 8% higher than analysts think in the third quarter and 3% higher in the next.

Investment banks are usually amongst the first to start reporting on Wall Street come earnings season. It’s certainly true this year. Of these, Goldman flags Bank of America as the one to keep an eye on. Goldman’s analysis puts BoA’s upside at 7% – some 10% higher than consensus.

Bank of America’s potential has been pegged to “significant remixing of cash into securities” by Goldman.

Smaller banks are represented by Signature Bank. Ryan Nash, a Goldman stock analyst, forecasts earnings-per-shares to come it at 7% higher than Wall Street forecasts this quarter and 5% for the next four. Signature is on course for a revenue-beating Q3, driven by an acceleration in loan growth.

Rounding off Goldman’s section of potentially consensus-beating stocks is Lowe’s. The DIY probably benefitted more than most from the pandemic last year, but this quarter it could offer investors an upside of 12%.

Goldman’s Kate McShane said Lowe’s position is stronger now than in the last 6-12 months, thanks to bringing forward its seasonal inventory purchases.

These stocks could help you ride the next crypto surge

Equities
Investments

Bank of America has picked out a number of stocks that could help investors get a slice of the cryptocurrency pie. Here they are.

Cryptocurrency stocks

Digital tokens on the rise?

Despite what some objectors and sceptics might say, it looks like cryptocurrency is here to stay.

Bitcoin has recently started heading upwards again. The token, which is the most popular in the world, recently passed the key $57,000 level – the highest levels since May. April’s $65,000 all-time high is still the target for BTC, but the industry is not just Bitcoin.

There are hundreds, thousands, of other digital tokens available. The industry’s collective valuation is currently north of $2 trillion – higher than the GDP of Canada with its bountiful natural resources.

Coins like Ether, Ripple, Cardano and even meme-based internet favourite Dogecoin, all have their own fans, representing billions in capital.

Cryptocurrencies seem like they’re becoming more resilient to outside pressures too. For example, Bitcoin’s current high performance flies in the face of China’s recent crypto ban. Before, such a measure would have sent the token spiralling downward. Now, even a flat out ban from one of the world’s foremost crypto markets isn’t enough to slow it down.

That being said, digital token prices can still show high volatility. Many investors and traders are still unsure if it’s a smart investment. Others prefer to stick with old school wealth stores like gold. But many are finding crypto a worthwhile pursuit. It’s basically down to how much volatility you can stomach.

But coins do not just generate themselves. To operate, the crypto industry requires an extensive ecosystem. It incorporates everything from technology providers, blockchain developers, payment platforms and plenty in between.

For investors to get involved in the next crypto gold rush without committing to coins, there are ways they can get involved. Of course, it goes without saying that any investments carry risk of capital loss. Investing should only be undertaken if you are comfortable taking any losses.

With that in mind, Bank of America analysts have selected several stocks they believe could offer investors value as the crypto industry grows.

Bank of America’s crypto stocks to watch

“A new generation of companies for digital assets trading, offerings and new applications across industries, including finance, supply chain, gaming and social media has been created. And yet we’re still in the early innings,” Bank of America said in a note, as reported by CNBC.

The bank’s digital finance stock selections look at the wider cryptocurrency sector.

Let’s start with power. Cryptocurrency mining, the process of minting fresh coins, is power intensive. Very power intensive. In fact, in 2020, Bitcoin mining alone used as much energy as Sweden.

According to Bank of America, nuclear power firms could be ready to pounce on the crypto sector. Environmental concerns around token mining’s emissions could push miners to look for low-carbon alternatives to their current options. With low emissions and round-the-clock reliability, nuclear could be the ideal fuel source for crypto mining.

With that in mind, BoA suggests Exelon, NRG Energy and Vistra could be energy companies to watch if they move into the crypto space.

Let’s talk data centres. Since China prohibited crypto mining in its territories, there’s been a mass exodus of mining operations. It looks like North America might become mining next hotspot.

“As digital asset mining migrates to North America due to China’s near complete ban of mining activities, public data-centre companies could view this niche market as an opportunity,” BoA analysts said.

A data centre boom may be on the way. To capitalise on this, Bank of America analysts recommend two stocks: Digital Reality and Equinix.

“Greater focus on the energy consumption of digital asset mining could increase demand for data centre operators with greater renewable energy sources,” the analysts said. “Equinix data centres are powered with 37% renewable energy with a target of 100% over the next decade.”

Payment platforms and banks should also be considered.

PayPal in particular is a “must own” for Bank of America.

“We view [Paypal] as a scarce asset with accelerating structural tailwinds, while the company is well on its way to transforming its digital wallet/app into a financial ‘Super App’ for its massive global consumer base,” the bank said.

Banks set to kick off US Q3 earnings season

Equities

The S&P 500 rose 8.5% to 3,363 over the third quarter, having hit an all-time of 3580 at the start of September, with an intraday peak at 3588. The market faced ongoing headwinds from the pandemic, but risk sentiment remained well supported through the quarter by fiscal and monetary policy.

A pullback in September erased the August rally but was largely seen as a necessary correction after an over-exuberant period of speculation and ‘hot’ money into a narrow range of stocks.

Q3 earnings come at important crossroads: Expectations for when any stimulus package will be agreed – and how big it should be – continue to drive a lot of the near-term price action, though the market has largely held its 3200-3400 range.

Elevated volatility is also expected around the Nov 3rd election. But next week we turn to earnings and the more mundane assessment of whether companies are actually making any money.

Banks kick off Q3 earnings season

Financials are in focus first: Citigroup and JPMorgan kick off the season formally on October 13th with Bank of America, Goldman Sachs and Wells Fargo on the 14th. Morgan Stanley reports on Oct 15th, In Q2, the big banks reported broadly similar trends with big increases in loan loss provisions offset by some stunning trading earnings.

Wall Street beasts – JPM, Goldman Sachs, Citi, Morgan Stanley and Bank of America – posted near-record trading revenues in the second quarter with revenues for the five combined topping $33bn, the best in a decade. At the time, we argued that investors need to ask whether the exceptional trading revenues are all that sustainable, and whether there needs to be a much larger increase for bad debt provisions.

Meanwhile, whilst the broad economic outlook has not deteriorated over the quarter, it has become clear that the recovery will be slower than it first appeared. Moreover, during Q3 the Fed announced a shift to average inflation targeting that implies interest rates will be on the floor for many years to come, so there is little prospect of any relief for compressed net interest margins.

Meanwhile there is growing evidence of a real problem in the commercial mortgage-backed securities (CMBS) market as new appraisals are seeing large swatches of real estate being marked down, particularly in the hotels and retail sectors.

At the same time, the energy sector has gone through a significant restructuring as we have seen North American oil and gas chapter 11 filings gathering pace through the summer as energy prices remained low. There is a tonne of debt maturing next year but how much will be repaid?

Key questions for the banks

  • Did the jump in trading revenues in Q2 carry through in Q3? Jamie Dimon thought it would halve.
  • On a related note, did the options frenzy in August help any bank more than others – Morgan Stanley?
  • Have provisions for bad loans increased materially over the quarter?
  • How bad are credit card, home and business loans?
  • And how bad is the commercial property sector, especially hotels and retail as evidence from the CMBS market starts to look very rocky?
  • How are bad debts in oil & gas looking?
  • How are job cuts helping Citigroup lower costs; how will its entry into China make a difference to the outlook?
  • How does Wells Fargo manage without an investment arm to lean on? So far it’s been a bit of a mess.
  • Was Warren Buffett right to cut his stake in Wells Fargo and some other US banks? Buffett pulled out airlines first then banks.
  • What do banks think of never-ending ZIRP and does the Fed’s shift affect forecasts at all?
  • How is Morgan Stanley’s wealth management division cushioning any drop in trading revenues?
  • What progress on Citigroup’s risk management system troubles?

Q2 earnings recap

JPMorgan beat on the top and bottom line. Revenues topped $33.8bn vs the $30.5bn expected, whilst earnings per share hit $1.38 vs $1.01 expected. The range of estimates was vast, so the consensus numbers were always going to be a little out.

The bank earned $4.7bn of net income in the second quarter despite building $8.9 billion of credit reserves thanks to its highest-ever quarterly revenue. Loan loss provisions were $10.5bn, which was more than expected and the quarter included almost $9bn in reserve builds largely due to Covid-19.

The consumer bank reported a net loss of $176 million, compared with net income of $4.2 billion in the prior year, predominantly driven by reserve builds. Net revenue was $12.2 billion, down 9%. Credit card sales were 23% lower, with average loans down 7%, while deposits rose 20% as consumers deleveraged.

The provision for credit losses in the consumer bank was $5.8 billion, up $4.7 billion from the prior year driven by reserve builds, chiefly in credit cards.

Trading revenues were phenomenal, rising 80% with fixed income revenues doubling. Return on equity (ROE) rose to 7% from 4% in Q1 but was still well down on the 16% a year before. ROTE rose to 9% from 5% in the prior quarter but was down from 20% a year before.

Citigroup EPS beat at $0.50 vs the $0.28 expected. Trading revenues in fixed income rose 68%, and made up the majority of the $6.9bn in Markets and Securities Services revenues, which rose 48%. Equity trading revenue dipped 3% to $770 million. Consumer banking revenues fell 10% to $7.34 billion, while net credit losses, jumped 12% year over year to $2.2 billion. Net income was down 73% year-on-year.

Since then the bank has offloaded its retail options market making business, leaving Morgan Stanley (reporting Oct 15th) as the major player left in this market. We await to see what kind of impact the explosion in options trading witnessed over the summer had on both. ROE stood at just 2.4% and ROTE at 2.9%.

Wells Fargo – which does not have the investment banking arm to lean on – increased credit loss provisions in the quarter to $9.5bn from $4bn in Q1, vs expectations of about $5bn. WFG reported a $2.4 billion loss for the quarter as revenues fell 17.6% year-on-year.

CEO Charlie Scharf was not mincing his words: “We are extremely disappointed in both our second quarter results and our intent to reduce our dividend. Our view of the length and severity of the economic downturn has deteriorated considerably from the assumptions used last quarter, which drove the $8.4 billion addition to our credit loss reserve in the second quarter.”

Bank of America reported earnings of $3.5 billion, with EPS of $0.37 ahead of the $0.27 expected on revenues of $22bn. Its bond trading revenue rose 50% to $3.2 billion, whilst equities trading revenue climbed 7% to $1.2 billion. But the bank increased reserves for credit losses by $4 billion and suffered an 11% decline in interest income.

Return on equity (ROE) fell to 5.44% from 5.91% in the prior quarter and was down significantly from last year’s Q2 11.62%. Return on tangible equity (ROTE) slipped to 7.63% from 8.32% in Q1 2020 and from 16.24% in Q2 2019.

Morgan Stanley was probably the winner from Q2 as it reported net revenues of $13.4 billion for the second quarter compared with $10.2 billion a year ago. Net income hit $3.2 billion, or $1.96 per diluted share, compared with net income of $2.2 billion, or $1.23, for the same period a year ago.

Wealth Management delivered a pre-tax income of $1.1 billion with a pre-tax margin of 24.4%. Investment banking rose 39%, with Sales and Trading revenues up 68%. MS managed to increase its ROE to 15.7%, and the ROTE to 17.8% from respectively 11.2% and 12.8% in Q2 2019.

Goldman Sachs reported net revenues of $13.30 billion and net earnings of $2.42 billion for the second quarter. EPS of $6.26 destroyed estimates for $3.78. Bond trading revenue rose by almost 150% to $4.24 billion, whilst equities trading revenue was up 46% to $2.94 billion. ROE came in at 11.1% and ROTE at 11.8%.

Expectations

(source: Markets.com)

Bank Forecast Revenues (no of estimates)

 

Forecast EPS (no of estimates)

 

BOA $20.8bn (8) $0.5 (23)
GS $9.1bn (15) $5 (21)
WFG $17.9bn (17) $0.4 (24)
JPM $28bn (19) $2.1 (23)
MS $10.4bn (15) $1.2 (20)
C $18.5bn (17) $2 (21)

 

Shares

None have really managed to match the recovery in the broad market but valuations are compelling.

Goldman trading either side of 200-day EMA

Wells Fargo can’t catch any bid

Bank of America bound by 50-day SMA

Citigroup still nursing losses after reversal in September

JPM breakouts consistently fail to hold above 200-day EMA

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