JPMorgan Chase: What Is The Deal?

| About: JPMorgan Chase (JPM)

Summary

I wanted you to buy under $60, but I am not sure shares will return there without a broader market selloff.

Q3 earnings are out and I discuss the critical metrics.

While the operating climate is difficult, JPM continues to have outstanding efficiency.

Wait for a pullback?

JPMorgan Chase (NYSE:JPM) is the largest bank in the United States by assets and has a market capitalization of $244 billion based on its current share price of $67.49. You also know that based on this market cap and name recognition alone, that this is also one of the largest companies in the country. JPMorgan has been a solid name that has been able to be traded successfully, but also makes for a solid longer-term investment, in my opinion, thanks to pending rate hikes. The fact is that like many other banks, JPMorgan is sitting in a good position to take advantage of the rise in interest rates. Right now the stock trades at just 11.4 times current earnings. For the most part, I think the data has strongly supported my prior buy call on the stock, which is near the top of a 52-week range of $52.50 to $69.06. With interest rates rising likely at the end of the year and into 2017, should you consider the name here?

I especially liked shares under $60, though it remains to be seen if we will get that chance again. Of course, this depends on the company's performance. And that is exactly what it comes down to. I was happy that JPMorgan saw a top and bottom line beat against analyst estimates in its Q3 2016 quarter. Managed revenue came in at $25.5 billion, which was a beat versus analyst estimates by a strong $1.5 billion and was up 8.4% year over year. This is now the fourth quarter in a row of outperformance. Earnings themselves were pretty strong, considering the operating climate. Net income was $6.3 billion, up from last quarter's $6.2 billion. On a per share basis, they came in at $1.58 per share, which beat estimates by a strong $0.19.

I am always on the lookout for several key figures such as loan and deposit growth. Well, the bank saw healthy growth in deposits which were up 11% year over year, or $58 billion, while average core loan balances were up 19% year over year, and set a new record. Further, credit card sales volume was up 10%, while merchant processing volume spiked 13% year over year. The company is really delivering in the growth of these critical measures. When we factor in the interest income, the loans and the associated expenses, the company delivered an efficiency ratio of 57%, which is strong. Ideally, I like this number to come in around 50%, so it is in fine shape. The bank is performing well and is increasing both loans and deposits.

Jamie Dimon, Chairman and CEO, commented on the financial results:

"We delivered strong results this quarter with each of our businesses performing well. We had record net income in Commercial Banking and record loan balances in Asset Management. The Corporate & Investment Bank reported its best third quarter revenue. In the Consumer businesses, we grew both loans and deposits double-digits, and our new card product, Sapphire Reserve, has gotten a great response - underscoring our unwavering commitment to enhancing customer engagement. Over the past months we have continued our extraordinary efforts and submitted what we believe is a credible Resolution Plan, as we remain focused on our regulatory and control agenda"

Bottom line is that I am of the opinion that the cycle upswing is just getting underway. I will reiterate that energy has been tough on banks, but otherwise I love that the company continues to surpass expectations and continues to be extremely shareholder friendly. It still pays a strong 3% dividend yield, and I expect the dividend to grow. In fact, the company recently raised the dividend to $0.48, up from $0.44 per share per quarter previously. The company bought back $2.1 billion of stock. All things considered, with rates rising, banks most certainly stand to gain. While the stock has been pressured, many metrics are moving in the right direction, though I would wait for a pullback.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.