JPMorgan Chase Earnings Preview: Outperforming Its Peers

About: JPMorgan Chase & Co. (JPM)
by: Rick Pendergraft

JPMorgan Chase is set to announce earnings before the opening bell on Tuesday.

The company has outperformed the other big banks in recent years and the stock has outpaced them as well.

Sentiment toward JPMorgan is mixed, but it has been shifting to a more bearish stance.

Big banks will get the earnings season going in earnest in the week ahead with JPMorgan Chase (JPM) scheduled to report Tuesday morning before the open. Citigroup (C) will actually get things started on Monday morning and Wells Fargo (WFC) will report on Tuesday morning as well. Bank of America (BAC) is scheduled to report on Wednesday.

I have written about JPMorgan in the past, but it has always been a comparison with it and the other big banks. This time, I wanted to focus just on JPMorgan Chase.

From a fundamental perspective, JPMorgan has outperformed the peers that I mentioned earlier. The company has been able to grow earnings at a rate of 18% per year over the last three years and they grew by 17% in the first quarter. During this same time period, sales increased by 11% per year and they were up by 13% in the first quarter.

The management efficiency measurements show that JPMorgan is above average in some areas, but average in other areas. The profit margin is well above average at 30.6% and so is the operating margin of 39.3%. The return on equity is average at 12.5% and the return on assets is low at 1.23%.

Analysts expect the company to earn $2.50 per share in the second quarter on revenue of $28.91 billion. The company earned $2.22 in the second quarter of 2018, so analysts expect the company to grow earnings by 12.6% on a year over year basis. The revenue forecast would mean growth of 1.8% if it proves to be true.

The Stock Has Outperformed Other Big Banks as Well

Over the past year, JPMorgan Chase has moved up 10.5%. That performance is slightly above the 8.14% return of the S&P and slightly above Citi and Bank of America. Wells Fargo has faced many obstacles, including not having a CEO, and has lagged the other banks and the overall market over the last year.

Looking at the weekly chart of JPMorgan, we see that the stock has moved up around 27% since the December low. We also see that a trend line has formed that connects the December low with the lows from March and May.

The stock was oversold in December based on the weekly stochastic readings and it was close based on the 10-week RSI. The rally off of that low took the oscillators up into overbought territory in April before dropping down in May. Now, we see that the indicators have moved back up in the last few months and are approaching overbought territory once again.

JPM SA3.png

Looking back at the end of 2016 and the beginning of 2017, the stock stayed in overbought territory for an extended period of time, so that isn't as much of a worry as it might be with some other stocks.

Something that stood out to me about JPMorgan in 2018 was how it was relatively calm compared to the overall market. For the first 11 and a half months of the year, the stock traded between $100 and $115. It finally fell below $100 in mid-December, but it has bounced back just as the market did.

The stock is above all three of the weekly moving averages on the chart, and I couldn't help but notice how the 52-week moving average acted as support last summer. Any kind of pullback in the weeks ahead could be thwarted by the support of the 52-week.

The Sentiment Is Mixed, but Growing More Bearish

Turning our attention to the sentiment for JPMorgan Chase, we see somewhat of a mixed picture. Analysts are relatively bearish on the stock while short sellers are relatively bullish. The put/call ratio is ever so slightly skewed to the bearish side.

Looking at the analyst ratings from the Wall Street Journal, there are 28 total ratings with 14 "buy" ratings, 13 "hold" ratings, and one "sell" rating. This gives us a buy percentage of an even 50% and that is well below the average of 65% to 75% for companies with solid fundamentals like JPMorgan.

JPM Analysts Ratings.jpg

The short interest ratio is currently at 2.0 which is a little on the low side of average. One thing about the short interest ratio though is that it has been moving higher over the past six months or so. When I wrote about JPMorgan back in January, the ratio was at 1.02. When I wrote about it again in April, the ratio had moved up to 1.48. The trend in the short interest ratio is clearly to the upside, but it has been a slow move higher.

Looking at the put/call ratio, there are currently 307,126 puts open on JPMorgan and they are countered by 299,039 calls. This puts the put/call ratio at 1.03. The average put/call ratio is in the 0.70 to 0.80 range, so this reading is a little higher than average. Like the short interest ratio, the put/call ratio has moved higher since the last earnings report. According to my article in April, the put/call ratio was at 0.794 back then. Once again, it isn't a huge jump to the bearish side, but it is definitely moving in that direction.

Bank stocks have been in the spotlight over the past week as Morgan Stanley (MS) and Citi have both downgraded the industry.

My Overall Take on JPMorgan Chase

As far as the big banks, JPMorgan is my favorite. The company has outperformed its peers and the stock has outperformed the others as well. The sentiment toward the stock is slightly more bearish than the others and that makes me think the stock will continue to outperform the group.

I am a little concerned about the banking industry as a whole because it appears as though we are entering a rate-cutting cycle and, historically, that has hurt banks. When rates are falling, the spread between the rates charged on loans and the rates paid out on deposits shrinks. This can hurt the margins of banks and cut into the earnings growth.

This development with rates is likely why Morgan Stanley and Citi both downgraded the industry as a whole or at least part of the reasoning.

Bank stocks may lag the overall market for the next few quarters, but if I have to have exposure to the banks in my portfolio, JPMorgan is the one I would choose.

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.