Shares of Mitsubishi UFJ Financial Group (8306.JP in Tokyo or MTU in New York) kept on tumbling today despite unexpectedly positive earnings for the third quarter. Net income climbed to 255 billion yen ($2.5 billion) in the three months ended on December 31. That was a 5.4% increase from the December quarter of 2012 and beat the average estimate of 200 billion yen by analysts surveyed by Bloomberg. The bank is now 86% of the way to its profit target for fiscal year that ends on March 31 2014.
So why is the stock down 12% from December 31 to the close on February 3? And why does it look poised to fall some more in the short term? (Mitsubishi UFJ Financial Group is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ At the $5.88 February 3 close the ADRs traded less than 1% below my original March 26, 2013 purchase price of $5.92. I’m leaving my target price at $7.10.)
The problem is worry about the bank’s exposure to the sinking Japanese stock market and brutally low loan margins. Read more
Not surprising that the financial sector led the U.S. market down today. The Standard & Poor’s 500 stock index closed down 0.13% on January 16 as the Financial Select Sector SPDR (XLF) dropped 0.63%.
Today’s villain was a big miss by Citigroup (C) before the open. Tomorrow doesn’t look a whole lot better for the sector because, after the close on January 16, American Express (AXP), Capital One (COF), and Sallie Mae (SLM) all reported significant earnings misses. American Express came in with fourth quarter earnings of $1.21 a share versus a consensus projection of $1.25. Capital One reported $1.45 a share instead of $1.57. And student loan company Sallie Mae announced 61 cents a share versus the analyst consensus of 73 cents a share.
The three stocks were down 0.14%, 2.21%, and 5.08% in after-hours trading
American Express was the victim of expectations that were a bit too heady. The company just about matched Wall Street’s projected revenue number at $8.54 billion (just shy of consensus at $8.55 billion) and came in just a few pennies short on earnings per share despite solid cuts to operating expenses (down 8%), an increase of 8% in spending by card members, and a drop in reserves for loan losses of 17% from the fourth quarter of 2012. Wall Street wanted more after the 59.3% return for the stock in 2013.
On the other hand, Capital One reported the kind of bad news we’ve heard from banks such as JPMorgan Chase (JPM) and Citigroup (C). Revenue dropped 1.4% from the fourth quarter of 2012. Loan growth was worse than piddling with auto loans falling by 3% and home loans declining by 4%. Net interest margins declined 16 basis points and provision for credit losses increased 13%.
These results, unfortunately for the sector, echoed Citigroup’s earnings report before the open today. The bank reported 85 cents a share in earnings when Wall Street was looking for 99 cents (or 95 cents depending on what consensus counter you follow.) The culprits were weaker than expected revenue, higher than expected provisions for loan losses, and greater than expected expenses. (Citigroup is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
The good news for the sector and the market is that tomorrow’s financial reporting from banks is dominated by regionals and that group has been doing better than the big money center banks. Read more
Wells Fargo is relatively upbeat about mortgages and margins in today’s post-earnings conference call
It was never about last quarter’s earnings. So while it was swell that Wells Fargo (WFC) beat Wall Street earnings estimates for the second quarter by 5 cents (at 98 cents a share) in results reported after the close yesterday, July 11, the real good news came in today’s relatively upbeat conference call in remarks about next quarter and the remainder of 2013.
The bank, a bellwether for the mortgage and housing sectors, said that looking forward it remained optimistic on the economy. Higher interest rates would indeed cut into mortgage originations and mortgage lending volumes would be down in the third quarter—directionally that is what investors expected to hear—but the deterioration described by the company didn’t sound too scary. Mortgage originations in the third quarter would decline, the bank guessed, to the vicinity of $100 billion versus $112 billion in the second quarter. (The $112 billion for the second quarter was up from $109 billion in the first quarter of 2013.)
Other metrics that had worried Wall Street going into the earnings report and the conference call got the same combo treatment of downward trend but not at a scary pace. Read more
Earnings season for the second quarter starts officially today when Alcoa (AA) reports after the close of the New York markets.
The quarter has shaped up as a major test for U.S. stocks. Analyst estimates call for earnings growth of just 1.8% this quarter for the stocks in the Standard & Poor’s 500 stock index, according to Bloomberg. Far and away the highest expectations are for the financial sector where earnings are projected to grow by 17%. Take away that performance by financials and the picture for the rest of the S&P 500 turns negative with earnings projected to drop by 1% for the non-financial stocks in the index.
With expectations for the current quarter so low guidance for the third quarter and the rest of 2013 will be crucial for setting market direction. Right now analysts are projecting 5.5% earnings growth for the third quarter and 11.2% for the fourth quarter. Typically earnings projections fall as the quarter in question approaches so everyone is expecting that these growth rates will get trimmed.
The question, though, is by how much?
Earnings in the first quarter grew by just 1.8%. Six months before the quarter closed analysts had projected 8.7% growth for the quarter.
Earnings from Alcoa won’t move the market. The company is expected to show a continued struggle with slow demand for aluminum and global over capacity in the industry.
But Alcoa’s read on global demand for aluminum will set the tone for earnings reports to come from other commodity producers. When it reported first quarter results back in April, the company held its forecast for global demand growth in aluminum at 7% and reduced its projections for aluminum supply surplus from 535,000 metric tons in the fourth quarter of 2013 to 155,000 metric tons in the second quarter as some producers closed capacity. A reduction in either that 7% demand projection or in the gradual reduction in surplus supply in the industry would start earnings season badly for commodity stocks.
However, given the high expectations for earnings growth at financial companies, Friday’s earnings reports from JPMorgan Chase (JPM) and Wells Fargo (WFC)—both before the market opens in New York—are far and away the big earnings events of the week. Read more
Nothing surprising in today’s announcement from Citigroup (C). After all one reason I added the stock to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ on April 17 was the expectation that the company would announce a significant share buyback program relatively soon.
Today the company’s board of directors voted to continue, as expected, the company’s token 1 cent a share quarterly dividend (payable to shareholders of record as of May 6) and approved the purchase of $1.2 billion in stock through the first quarter of 2014.
The stock repurchase became possible after Citigroup passed the Federal Reserve’s last Comprehensive Capital Analysis and Review (CCAR.) The size of the purchase is roughly enough to offset the dilution created by the company’s annual stock grants so it’s not a major support for the share price. Instead it’s significant as a milestone on the bank’s post-financial crisis journey back to the status of an average bank.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in Citigroup as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/