Wells Fargo analyst Matthew Burnell said on Wednesday that "through January 2012, the large-cap banks that have outperformed the most visibly were those that experienced the greatest share price volatility in 2011." In addition to Bank of America, a volatile name during 2011 seeing a sprightly return this year is Regions Financial, with shares rising 24 percent during January, to close Tuesday at $5.22, despite the stigma of owing $3.5 billion in federal bailout funds received through the Troubled Assets Relief Program, or TARP.
Burnell said the January pop for the banking sector resulted from a "confluence of positive trends," including improved sentiment in the U.S., "reduced concerns related to a disorderly default of euro zone countries following the launch of the (European Central Bank) emergency funding scheme," and "greater hopes for governmental programs that could offer greater support for the weak U.S. housing/mortgage markets." On the other hand, Burnell said that the Federal Reserve's plan to keep rates at historically low levels through 2014 are "dampening investors' hopes of a rebound in core profitability for the banks in mid/late 2013."
Investors took comfort in Bank of America's lack of fourth-quarter mortgage-related surprises, along with an increase in the company's Tier 1 common equity ratio to 9.86 percent as of Dec. 31 from 8.65 percent the previous quarter, from the sale of shares in the China Construction Bank, as well as a common equity offering, and the retirement of preferred shares and long-term debt.
Bank of America's shares were so heavily discounted to book value, that the dilutive offering of 400 common shares during the fourth quarter, was brushed aside.
The shares are still heavily discounted, trading at just 0.6 times tangible book value, according to HighlineFI, however, with a slew of earnings estimate cuts from analysts, the shares now trade for nearly 10 times the consensus 2012 EPS estimate of 73 cents, among analysts polled by Thomson Reuters.
Guggenheim Securities analyst Marty Mosby on Tuesday reiterated his neutral rating for Bank of America, but increased his 12-month price target to $9.00 from $6.50. Mosby estimates that Bank of America will earn 92 cents a share in 2012, which is well ahead of the consensus estimate of 73 cents, among analysts polled by Thomson Reuters, but is 72 percent the company's pre-provision earnings of $4.54 a share in 2007.
When discussing the enhanced Basel III capital requirements and the current round of Federal Reserve stress tests, Mosby said that Bank of America wouldn't need to issue additional common shares even under a "worst case" scenario.
Bank of America's heavy discount to book value of course reflects the continued mortgage putback overhang, springing mainly from the company's purchase of Countrywide Financial in 2008. Way back then, former BAC CEO Ken Lewis aimed to lock up a solid leading position in mortgage lending and servicing, for the long haul. FBR analyst Paul Miller on Wednesday said that "Bank of America dropped from 20 percent share in the mortgage origination market in 2010 to 5 percent by the end of 2011, making room for smaller players."
"The most recent origination estimates we have seen support this point," said Miller, "as Fifth Third, U.S. Bank [the main subsidiary of U.S. Bancorp], PHH Mortgage, Quicken Home Loans, Provident Funding, and BB&T have more than doubled their market share from 2007 to 2011."
The second-best Dow 30 performer during January was Caterpillar, with shares returning 21 percent year-to-date, to close at $109.12 on Tuesday.
Based on a quarterly payout of 46 cents, the shares have a dividend yield of 1.69 percent.
Following Caterpillar's announcement last Thursday of a fourth-quarter profit of $1.5 billion, or $2.32 a share, increasing from $968 million, or $1.47 a share, in the fourth-quarter of 2010 and blowing past the consensus EPS estimate of $1.73, Credit Suisse analyst Jamie Cook said the company "put up a monster beat," while "continuing to show evidence it's tackling operational issues of the past."
Caterpillar's fourth-quarter revenue was up 35 percent year-over-year, to $17.2 billion, and the company said its "outlook for 2012 sales and revenues has increased and is expected to be in a range of $68 to $72 billion," while "profit per share is expected to be about $9.25 at the middle of the sales and revenues range."
Cook called Caterpillar's guidance "reasonable," but "likely conservative," and estimates the company will earn $9.60 a share in 2012, followed by EPS of $11.60 in 2013 and $13.20 in 2014. The analyst added that "CAT remains our top pick for 2012, reflecting evidence the NA construction cycle is gaining legs, coupled with continued strength in higher margin resource/power systems and further buoyed by leverage from operational improvements at hand."
Cook raised his price target for Caterpillar to $138 from $117.
Caterpillar trades for 12 times the consensus 2012 EPS estimate of $9.38.
Third-place among the top five Dow performers in January goes to Alcoa, with shares returning 17 percent year-to-date, to close at $10.16 on Tuesday.
Alcoa kicked-off earnings season by meeting analysts' expectations, with an adjusted fourth-quarter loss from continuing operations of $34 million, or 3 cents a share, but beating the consensus revenue estimate of $5.7 billion by reporting revenue of $5.99 billion.
Davenport & Co. analyst Lloyd O'Carroll on Jan. 23 reiterated his "buy" rating for Alcoa, with an $18 price target, while updating his "long-term valuation" to $22 from $20 a year earlier, adding that "On a takeout basis, we believe that this value could reach as high as $25" per share.
O'Carroll said he expected "the stock to follow aluminum prices in the near term so that the dominant factor for Alcoa in '12 will likely be the cyclical recovery."
The analyst is way out in front of the consensus, estimating that Alcoa will earn 96 cents a share in 2012, followed by EPS of $1.46 in 2013.
O'Carroll added that "We think AA is suitable for long-term value investors," on the premise that aluminum prices are higher next year and that record profitability in the downstream businesses in '11 goes even higher in '12."
The shares trade for 19 times the consensus 2012 EPS estimate of 53 cents.
Microsoft ranked fourth among the Dow 30 in January, with shares returning 14 percent to close Tuesday at $29.53.
Based on a quarterly payout of 20 cents, the shares have a dividend yield of 2.71 percent.
Microsoft on Jan. 19 announced fiscal second-quarter earnings of $6.62 billion, or 78 cents a share, two cents ahead of the consensus EPS estimate. Earnings were down slightly from $6.63 billion, or 77 cents a share, a year earlier.
Fiscal second-quarter revenue was $20.89 billion, increasing from $19.95 billion, a year earlier.
Wells Fargo analyst Jason Maynard on Jan. 20 reiterated his "market perform" rating for Microsoft, saying the stock was "only reasonably undervalued at current levels," and that he doesn't "expect to see much lift until Windows 8 is released and/or Windows Phone shows some traction in the smartphone market."
With touch-screen functionality on a fully capable machine with a proper amount of on-board storage that will be able to smoothly run Microsoft Office applications out of the box, Windows 8 promises to be an exciting transition for dedicated PC users, while offering the best of both worlds for tablet users.
Maynard called the planned late-February beta release of Windows 8 a "big deal," and that positive feedback from software developers "could be a catalyst for a bigger move, up or down, in the stock," in light of the "volume of new Android 4.0 tablets coming to market as well as the disruptive success of Amazon's Kindle Fire."
There's also hope for Windows Phone, according to Maynard, who said that "over the course of the last few weeks, we have had the opportunity to play with the various Windows Phones and think they have done a nice job overall. The UI is clean and it is fair to say they have made some material progress, in our view."
Microsoft's shares trade for 11 times the consensus fiscal 2012 EPS estimate of $2.68.
JPMorgan Chase ranks fifth among Dow 30 components for January, with shares returning 13 percent to close Tuesday at $37.30, following a 20 percent decline in 2012.
Based on a quarterly payout of 25 cents, the shares have a dividend yield of 2.70 percent.
A major theme for investors as JPMorgan Chase and other major U.S. bank holding companies is an expected increase in returns of capital to investors through dividend increases and share buybacks. JPMorgan repurchased $9 billion worth of shares in 2011.
Bank of America Merrill Lynch analyst Guy Moszkowski said on Tuesday that although the Federal Reserve has not given guidance on "total payout ratios, language suggests the Fed clearly favors higher mix of buybacks vs. dividends," which is "consistent with JPM's own bias, as shares look cheap vs. current book value." The analyst added that "JPM is less concerned about pursuing aggressive capital plans in 2012, as significant excess capital generation supports meaningful capital return over time."
Moszkowski estimates that JPMorgan will continue paying an annual dividend of a dollar a share for 2012, for a total of $3.7 billion, while repurchasing $4.5 billion in common shares, "for a total payout ratio of 48 percent."
The shares trade for 1.2 times tangible book value, according to HighlineFI, and for eight times the consensus 2012 EPS estimate of $4.67.
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