Cash stashed in a bank savings account has been earning less than 0.1% interest for the past decade. That’s still better than bank stocks have done so far in 2022. Bank stocks have dropped by more than 23% since the beginning of the year.
Shares in banks and credit card issuers have fallen far enough that they now offer an “attractive entry point” according to analysts at Baird Equity Research. In a research note Friday morning, Baird raised its rating on four financial services stocks from Neutral to Outperform while keeping its price target on three and raising it on one of the stocks. Financial firms included in the review were American Express Co. (NYSE: AXP), Capital One Financial Corp. (NYSE: COF), Fifth Third Bancorp (NASDAQ: FITB) and M&T Bank Corp. (NYSE: MTB).
The analysts’ overall view is that macroeconomic uncertainty caused by Fed tightening, higher inflation, and increased volatility already has been priced into these stocks and that they are trading at a discount of 15% to 20% based on the pre-provisioning net revenue, price to earnings (P/E) ratios and capitalization to assets ratio. Even increasing interest rates on savings accounts (deposit betas in bank jargon) “aren’t a major concern” to Baird’s analysts.
Recent weakness in share prices and a positive shift in sentiment have improved the risk/reward trade-off for these four stocks. Baird’s company ratings include a risk component as well as an investment component. Risk includes four levels: Low, Average, Higher and Speculative. All four stocks discussed in the research have either average (capital appreciation with an emphasis on safety) or higher (capital appreciation with acceptance of risk) risk ratings.
Baird’s price target on American Express was left unchanged at $175, and the risk score remained at Higher. The stock currently trades at a slight discount to its pre-provision net revenue and P/E, as well as at around 12 times estimated earnings per share for the second 12-month period (12 to 24 months out).
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The analysts commented:
AXP has been executing very well and should continue leveraging its ongoing franchise investments into market share gains and earnings growth over the intermediate term. Strong customer retention levels, positive operating leverage, peer-leading credit metrics, and traction with younger consumers (millennials/Gen Z) leave the company well positioned overall.
The upside potential on the stock based on Thursday’s closing price of $137.50 and Baird’s target is 27.3%. American Express stock is down 15.5% so far in 2022. Key risks include slower customer spending, higher credit losses, and intensifying competition.
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