JPMorgan Earnings Preview: Expense Savings Help, But Revenue Growth Is Key

| About: JPMorgan Chase (JPM)

JP Morgan (NYSE:JPM), arguably the best-in-class financial services firm in the world today, reports its 2nd quarter, 2013 earnings results before the market opens on Friday, July 12, 2013.

Consensus analyst expectations are looking for $1.41 in earnings per share (EPS) on $24.7 billion in revenues for expected year-over-year growth of 28% and 8% respectively.

Both Q2 '13 EPS and revenue expectations have drifted higher since the last April '13 earnings report.

The bank will be lapping the whole London Whale fiasco this quarter, which resulted in a very large charge to last year's Q2 '12 EPS. After excluding the London Whale issue from 2012's 2nd quarter, JPM was thought to have earned (on an operating basis) $1.00 and $1.20 per share, although the bank did have a very large reserve release in Q2 '12 as well.

Large money center banks like JPM are a conglomeration of many businesses, i.e. investment banks, spread lenders, credit card operations, mortgage companies, securities processing, etc. etc. depending on the bank.

Here is a quick look by segment, although JPM after the London Whale event restructured the segments and reporting so we are taking a stab using the old numbers:

Investment bank: the I/B is between 20% - 30% of net revenues, but more importantly is "leverageable" from its 18% - 33% of operating profits, when capital markets are favorable. The equity IPO market has returned, and despite the May - June swoon in the bond markets, I don't think the move in rates will dramatically impact JPM's Q2. Look for the I Bank to be a net positive contributor this quarter, with a drag from commodities. It will take a more favorable equity market along with an orderly rise in interest to further leverage the bank's revenues.

Retail Financial and Credit Cards: between 45% and 55% of JPM's total revenues and 50% to 70% of operating profits

Credit and reserves: Reserve releases will likely continue to decline, and "the credit play" in terms of further credit improvement in the bank's mortgage, credit card and loan portfolios is likely in the later innings. This is true not just for JPM but for all banks for the most part. Credit is improving as consumer balance sheets and housing prices have rebounded.

Loan Growth: While consumer loan growth has stayed healthy, the rebound in home prices should eventually help home equity lending, and commercial and industrial loan growth, is just getting started, or has softened a bit of late. As credit diminishes in importance, new loans and lending need to fill the void. Commercial Banking is 5% - 10% of JPM's revenues and between 10% and 15% of operating profits.

Asset Management: 10% of JPM's revenues and between 6% and 8% of operating profits, this unit provides stability to JPM's former capital markets operations.

JPM's EPS and Revenue estimates - 2013 and 2014
Date - qtr end 2013 EPS 2014 EPS 2013 Rev 2014 Rev
7/2/13 $5.74 $5.98 $99.2 $101.8
4/30/13 $5.66 $5.93 $99.7 $102.6
1/31/13 $5.34 $5.75 $100.0 $102.2
10/31/12 $5.31 $5.69 $100.7 $103.5
7/31/12 $5.21 $5.63 $99.9 $103.8
6/30/12 $5.31 $5.82 $101 bl $105.7

* Source: ThomsonReuters

The reader can quickly see that JPM's revenue estimates have been flat to declining, which could be a function of less risk-taking after the London Whale, it hasn't stopped the positive upward revisions to EPS.

Last quarter, calendar Q1 '13, when JPM reported a 4% decline in revenues but a 20% gain in EPS, expense management and savings were a major part of the EPS driver.

Because of the London Whale fiasco and Dodd-Frank strangulation, JPM just might not be able to generate the revenue growth that it was capable of doing in the past.

That being said, and if that is the case, it should generate a more stable and consistent EPS stream, with less volatility, which is just as, if not more valuable, than a hedge fund in drag.

I think JPM has at least $6.50 in sustainable earnings power, so I also think the stock is worth at least $60 per share, maybe more. Morningstar's intrinsic value estimate is $53, and it is typically conservative.

Here is our preview of Q2 '13 published on Seeking Alpha in the last 24 hours. I do think the Financial sector will report a very good quarter, and will have a very good 2013, thanks to the IPO market, M&A, debt and equity underwriting, etc.

If JPM can generate 8% revenue growth in an environment where the S&P 500 is generating just 1% revenue growth and financials as a sector is just 2% - 3%, we should see relative outperformance.

Disclosure: I am long JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.