JPMorgan Chase & Co. (JPM) is scheduled to report its first quarter 2012 results before the market opens on Friday, April 13. The Zacks Consensus Estimate for the quarter is $1.17 per share, representing a year-over-year slump of about 9%.
After profit declines for two straight quarters, we expect JPMorgan to report impressive numbers this quarter as it is wont to do. Marked recovery of the bond and equity market and consequent revenue growth forms the basis of our assumption.
Though there are fundamental pressures like low interest rates and sluggish loan demand growth on the sector, improving macroeconomic elements, such as rising consumer spending and lower unemployment, are expected to bring revenue stability for JPMorgan and the other major U.S. banks.
However, JPMorgan has been fighting with poor capital market revenues, low liquidity and a tough regulatory environment, which might mar its results to some extent. However, reduction in reserves for future losses, gradually improving retail banking performance, and steady credit trends in its credit card business are expected to be on the positive side.
Previous Quarter Performance
JPMorgan’s fourth quarter earnings per share of 90 cents marginally missed the Zacks Consensus Estimate of 92 cents. Results were worse than $1.12 earned in the prior-year quarter. After a long time, JPMorgan missed earnings expectation during the quarter as it buckled under the weakness in the wider economy and the fundamental pressures on the banking sector.
Earnings per share for the reported quarter included certain significant nonrecurring items, such as a 9 cent loss from debit valuation adjustment (DVA) gains in the Investment Bank, expense for additional litigation reserves of 8 cents and a benefit from reduced loan loss reserves of 11 cents. Excluding these items, JPMorgan’s earnings came in at 96 cents per share.
Results for the reported quarter were primarily hurt by a substantial decrease in revenue, which more than offset a slowdown in provision for credit losses and lower non-interest expense.
Managed net revenue of $22.2 billion in the quarter was down 17% from the year-ago quarter. The figure also compared unfavorably with the Zacks Consensus Estimate of $23.0 billion.
Earnings Estimate Revisions - Overview
Ahead of the earnings release, Zacks Consensus Estimate for the first quarter is slightly up. A significant upward trend in estimate revision is also palpable, making the strength in the stock more obvious.
We will now discuss the details of earnings estimate revisions to substantiate why short-term investors should add this stock to their investment kitty.
Agreement of Estimate Revisions
The estimate revision trend confirms that the majority of analysts are in agreement about a better first quarter earnings at JPMorgan. Of the 23 analysts covering the stock, 4 have increased their estimates for the first quarter, while 2 have moved in the opposite direction over the last 7 days.
Over the last 30 days, an absolute positive bias has been seen with 17 analysts revising their estimates upward and only 2 differing.
Also, for full-year 2012, there were 4 upward estimate revisions and 1 downward movement over the last 7 days.
Magnitude of Estimate Revisions
The Zacks Consensus Estimate for the first quarter headed north only by a penny over the last 7 days. Over the last 30 days, the estimate for the quarter increased 7 cents. For full-year 2012, the estimate increased 2 cents to $4.82 per share over the last 7 days.
JPMorgan’s performance has been almost stable over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 6%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
The estimate revision trend indicates that fresh short-term investment in this stock will be a good decision. Also, one can consider a company like JPMorgan as value investment due to its steady dividend-yielding nature.
Last month, the Federal Reserve released the fourth round of stress test results, giving many big banks including JPMorgan the green signal for deploying capital to shareholders. Consequently, the company announced a 20% increase in its quarterly dividend to 30 cents per share. The company also announced a new share repurchase authorization.
This is the second time JPMorgan hiked its dividend since the financial crisis. Prior to this, the company had increased its quarterly dividend five-fold to 25 cents in March 2011.
Moreover, an investor with the appetite to absorb risks related to market volatility should not be disappointed with an investment in JPMorgan over the long haul. Though the stock is not trading for less than what it is worth, JPMorgan’s fundamentals remain highly promising with a diverse business model and a strong balance sheet.
Also, from the risk perspective, as JPMorgan cleared the most difficult stress test, it is for sure that the company will be able to withstand another financial crisis.
Most importantly, despite the macro pressure on credit quality, JPMorgan’s credit metrics have been steadily improving since the final quarter of 2009. Though provision continued to reflect elevated losses in the mortgage and home equity portfolios, we are impressed to see a modest improvement in delinquency trends and net charge-offs. We expect credit quality to continue improving, thereby providing more room for bottom-line improvement.
Though there are concerns related to its exposure to the European economy, equity-centric activities in the U.S. are expected to support JPMorgan’s results in the upcoming quarters with the continuous recovery of the capital markets.
Yet, net interest margin (NIM) continues to remain under pressure, affecting the traditional banking businesses. Also, with the thrust of new banking regulations, there will be pressure on fees, and loan growth could remain feeble.
Going by estimate revision trends and the magnitude of such revisions, there is admittedly an upward pressure, though slight, on the shares over the near term.
JPMorgan shares maintain a Zacks #3 Rank, which translates into a short-term Hold’ rating. Considering the company’s business model and fundamentals, we also have a long-term “Neutral” recommendation on the stock.
As JPMorgan is a banking giant with exposure in almost all banking businesses and is one of the first two important bankers to kick start first quarter results, the release is going to be a significant indicator of performance in the key banking sector. Wells Fargo & Company (WFC) has advanced its earnings release date this quarter by about a week and will report on the same day with JPMorgan.
Close on the heels of JPMorgan and Wells Fargo, the other major banks, namely Citigroup Inc. (C) is scheduled to report on April 16, Goldman Sachs Group Inc. (GS) on April 17, and Bank of America Corporation (BAC) and Morgan Stanley (MS) on April 19.