The earnings season is drawing to a close, with results from more than 409 S&P 500 members already out. Performance of Major Banks on the index (accounting for nearly 45% of the Zacks Finance sector's total earnings) in first-quarter 2018 was quite impressive, with 30.8% year-over-year earnings growth. This compares favorably with 2.4% rise registered in the prior quarter.
Today, we are discussing two of the biggest banks in the United States — JPMorgan JPM and Bank of America BAC — with market capitalization of $372.3 billion and $300.5 billion, respectively. Both are part of the same industry, which has a Zacks Industry Rank #26 (top 10%). Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than two to one.
Notably, the results for both JPMorgan and BofA improved on the back of rise in lending activities and economic stability. Further, rebound in trading activities and decent investment banking performance supported the results.
Going forward, both JPMorgan and BofA expect lower tax rates to continue benefitting profitability. Also, both are influenced by almost similar economic backdrop as they have the same business operations. Further, the improving rate environment, rise in loan demand and potential lesser regulations will be beneficial for them.
Both JPMorgan and BofA carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let's take a closer look at how JPMorgan and BofA are stacked up against each other in terms of certain key metrics.
Both the companies have outperformed the industry (down 3.5%) so far this year. While shares of JPMorgan have gained 2.3%, BofA has inched up just 0.4%. So, JPMorgan has performed better than BofA.
Both the banks have been meaningfully deploying capital in terms of dividend payments and share repurchases to enhance shareholder value.
JPMorgan has a current dividend yield of 2.05% while BofA has a dividend yield of 1.62%. Although both the stocks’ dividend yield is lower than the industry’s average of 2.11%, JPMorgan has an edge over BofA here as well.
Both JPMorgan and BofA have a higher debt-to-equity ratio compared with the industry average of 0.92. But BofA with a leverage ratio of 0.96 has an edge over JPMorgan with the same of 1.19.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12 months for JPMorgan and BofA is 12.60% and 9.40%, respectively. Further, with industry’s average of 10.44%, JPMorgan is efficient in using shareholders’ funds.
Hence JPMorgan holds an edge here.
Earnings Estimate Revisions & Growth Projections
Both JPMorgan and BofA has seen the Zacks Consensus Estimate for 2018 earnings being revised upward. Over the last 30 days, earnings estimates have moved 1.8% and 2.4% upward for JPMorgan and BofA.
For JPMorgan, the consensus estimate for earnings per share is pegged at $9.05 for 2018, representing year-over-year growth of 31.7%. The stock has long-term expected earnings growth rate of 6.7%.
For BofA, the Zacks Consensus Estimate stands at $2.55 for 2018, reflecting a year-over-year jump of 39.3%. The stock has long-term expected earnings growth rate of 8%.
Therefore, this round is biased toward BofA.
Sales Growth Projections
For JPMorgan, the Zacks Consensus Estimate for sales is $110.6 billion for 2018, reflecting 11% rise from the prior year.
For BofA, the consensus estimate for sales stands at $92.3 billion, indicating growth of 5.7% year over year.
Therefore, JPMorgan has an edge here too.
JPMorgan seems overvalued when compared with the broader industry. Its current price-to-sales and price-book ratios are above than the respective industry averages.
BofA, on the other hand, seems undervalued when compared with the broader industry. Its current price-to-sales and price-book ratios are lower than the respective industry averages.
So, BofA holds the edge over JPMorgan here as well.
Our comparative analysis indicates that JPMorgan is poised better than BofA post first-quarter earnings when considering price performance, dividend yield, ROE and sales growth expectations. BofA wins on earnings growth projections, undervaluation and superior leverage ratio.
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