Best-Performing Bank Stocks Are Also Among the Cheapest

Tickers in this article: CMA I:BKX JPM USB

NEW YORK ( TheStreet) -- Even as the bank-stock rally accelerated this month, some of the best-performing large-cap companies may still be undervalued.

After the KBW Bank Index (I:BKX) dropped 25% in 2011, with global firms like Bank of America (BAC) and Citigroup(C) posting epic declines, the index rocketed 30% last year. Bank of America led the way, more than doubling, while Citigroup jumped 51%.

The KBW Bank Index rose 6% from the start of the year through Friday's close at 51.28, putting it on track to double last year's returns if it continues at that pace.

Even with outsized gains, some of the best bank performers are still trading for relatively low prices compared with their laggard peers.

U.S. Bancorp (USB) of Minneapolis, for example, recorded a 2012 operating return on average assets (ROA) of 1.62%, according to Thomson Reuters Bank Insight, making it one of the best performers among large-cap banks. This performance was not an aberration, as the company was in the top five for return on average equity among actively traded U.S. bank stocks from the beginning of 2006 through the third quarter of 2012.

U.S. Bancorp's shares closed at $33.17 Friday, trading for a relatively low 10 times the consensus 2014 earnings estimate of $3.30 among analysts polled by Thomson Reuters. Shares of Comerica(CMA) of Dallas closed at $33.71 on Friday, trading for 12.1 times the consensus 2014 EPS estimate of $2.78, while the company's 2012 ROA was only 0.83%.

Of course, investors will want to consider expected future performance when making decisions. Stifel Nicolaus analyst Christopher Mutascio said in a report Friday that his firm's projected 2014 ROA for U.S. Bancorp was 1.62%, while the projected 2014 ROA for Comerica was only 0.85%. The analyst's 2014 EPS estimate for U.S. Bancorp is $3.25, while his 2014 EPS estimate for Comerica is $2.85.

Comerica "is currently being awarded the highest P/E multiple (by a wide margin) of any large cap we cover," Mutascio said. Its price-to-earnings multiple of 11.8 represents a 22% premium to the average and median of the group, he said.

So why does Comerica trade at one of the highest forward price-to-earnings estimates among large regional banks, while its projected ROA is one of the lowest in the group at just 0.75% versus the group's average/median range of 1% to 1.07%? Mutascio said "the market believes CMA is currently under-earning in the low interest rate environment and that our current 2014 EPS estimate does not reflect the earnings power of the franchise in a 'normal' short-term interest rate environment."

Mutascio said "the market seems to be more optimistic than us as to when short-term interest rates will rise," adding that the increase in the yield on 10-year U.S. Treasury securities -- which climbed to 1.98% on Friday from about 1.60% in early December -- "is not a needle mover," because Comerica's earnings power isn't tied to long-term rates.