Here come earnings, a quick at look Bank of America

Stocks rose to new heights yesterday, helped along by mostly positive rhetoric from Fed bankers. A fresh wave of earnings hits this morning and will set the tone for the days… and weeks to come.

What’s in a number? In case you haven’t heard me say it enough times, “welcome to earnings season.” First off, EARNINGS are really important. Don’t you want to know how well your favorite portfolio companies did last quarter? Wouldn’t you like to hear from the CEO’s own mouth what she or he thinks of those results and what they might be expecting in the future? Yes, I know, interest rates, the Fed, the economy, wars, elections, etc. They are all important, but company health trumps all that stuff. Even a dovish Fed, a peaceful globe, an honest politician, and solid economy cannot help a company that has failed at meeting its stated goals or has lost its way. So, yeah, earnings are important, and here we are. If you have read my notes in recent days, you know that financials are the first major sector to announce their Q3 results. That is just a rule of thumb, however, as there are plenty of non-financials scheduled over the next few days. You should download the earnings calendars I attached and post on the blog on Monday’s. I list the most popular stocks reporting in the week ahead along with their EPS and Revenue estimates. If you are so inclined, many of them will allow you to dial into their earnings call; I provide those numbers as well.

As you have probably already figured out, simply beating EPS and Revenue estimates is not enough to guarantee continued success in the market. No, each sector… each industry… each sub-industry all has their own specific nuances. Of course, each company has its own specific nuances. For example, financials are judged on different metrics than, say, information techs, software & services are judged differently than hardware & equipment, semiconductors are judged differently than semiconductor equipment, and NVIDIA is judged differently than Micron Technology.

Let’s have a quick look at banks which is in the financials sector. Financials also includes insurance, and financial services, but today its banks, specifically diversified banks, and even more specifically Bank of America Corp. Why? Because BofA announced its earnings this morning beating EPS and Revenues by +6.48% and +0.71% respectively. So, what does that mean? Well, we look at the median estimates of all the blue-chip analysts and see where the actual results come in. Better or worse.

Each analyst has their own specific method of coming up with those projections, but generally they are all working from the same information. Information provided by company guidance, third-parties, past performance, etc. At the end of the day, most of us would like to see that a company is at least able to meet or exceed what those analysts are expecting in revenues and earnings. Looking deeper, we might want to see how EPS or Revenue have grown since the prior quarter or the same quarter a year ago. In the case of BofA its $0.81 EPS declined by -10.8% from the same quarter a year ago and by -2.4% from the prior quarter, so earnings are slowing. Revenues have increased by +0.3% from last year but slowed since last quarter. If revenues have increased and earnings have declined, it is clear that expenses are growing. Furthermore, EPS growth for banks is expected to be around +8.87%, so it is important to look deeper yet.

By looking at the company’s business model, we can see where they may have improved and where they may be struggling. In sales and trading, the company grew revenues over last quarter and last year. Investment banking fees, while they beat estimates, were lower than the prior quarter but still above those from the same quarter last year with the biggest declines coming from equity and debt underwriting. Wealth and investment management revenue increased from the prior quarter and year also beating analyst’s expectations by +2.3%. Because the company is also a retail bank, we would like to know how well they do in their banking business, and the metric we use for that is net interest margin (NIM), which I mentioned in yesterday's note and Malek Market Minute video (posted most days on Instagram). In the case of BofA, its NIM declined QoQ and YoY, and it missed analyst forecasts by a slim -0.63%. Finally, total deposits increased over the prior quarter and year, although they were slightly less than analysts were expecting. All in all, not too bad. Next, we may wonder about the health of the company’s loan book. Provision for credit losses increased from last quarter, but above analyst targets. Non-performing loans were higher than analysts were expecting, with consumer doing better and commercial doing worse.

Lastly, the company’s full year expected P/E ratio of 13x is slightly higher than the 12.6x of its peers. Its full year expected EPS growth decline of -4.55% is less than the -5.66% decline expected of its peers. BofA’s dividend yield of 2.48% is less than the 3.15% yield of its peers. Of the analysts that cover the company, 60% rate it a BUY and 40% rate it a HOLD. It has the potential to increase by +8.2% based on average analyst estimates. Of those analysts, 36% of them have changed those targets in the past month, 3 raised them while 6 lowered them. The company has gone up by +61.0% in the past year.

So, will the company continue to climb and reach its target? Will it blow through the target and reach higher heights? Clearly interest rates, market performance, and the economy will affect its future results. For now, the market likes what it learned this morning as the stock is trading higher by +2.15% in the premarket. Of course, that can change in the session ahead as analysts AND YOU dig through the numbers further. A final note. The analysis I demonstrated is in no way exhaustive enough to make a buy/sell decision. I wanted to give you a small glimpse into what you can look into, one layer below simply EPS and Revenue beats/misses. Also, as I said up top, each sector and stock have a different business model, so you have to be aware of how all your potential investments operate. Remember, you have to do your homework, and there are no shortcuts. Stay focused.

YESTERDAY’S MARKETS

NEXT UP

• Empire Manufacturing (Oct) may have declined to 3.6 from 11.5. This is a highly watched number and a good indicator of manufacturing which has been on the slide, as of late. Don’t be surprised if this becomes a market mover.
• Today’s Fed speakers include Daly, Kugler, and Bostic.
• This morning UnitedHealth Group, J&J, PNC, BofA, Walgreens, State Street, Goldman Sachs, and Citigroup all beat on EPS and Revenues. After the closing bell, we will hear from JB Hunt and United Airlines Holdings.

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