JPMorgan Earnings Preview

By Kalyan Nandy

JPMorgan Chase & Co. (JPM) is scheduled to report its third quarter 2011 results before the market opens on Thursday, October 13. The Zacks Consensus Estimate for the quarter is 98 cents per share, representing a year-over-year slump of about 3%.

Unlike before, we do not expect JPMorgan to outperform as the sector was fraught with poor revenue figures, weak loan demand and low liquidity throughout the quarter. Weak trading and retail performances along with volatile equity markets may drastically mar results. However, reduction in reserves for future losses and strong credit trends in its credit card and wholesale business are expected to offset the negatives.

Previous Quarter Performance

JPMorgan’s second quarter earnings per share came in at $1.34, substantially ahead of the Zacks Consensus Estimate of $1.21. Results also soared from earnings of $1.09 in the prior-year quarter.

The stellar numbers were primarily supported by a substantial slowdown in provision for credit losses and higher net revenue, which more than offset an increase in non-interest expense and lower net interest income.

Managed net revenue for the quarter came in at $27.4 billion, up 7% from $25.6 billion in the year-ago quarter. This also compared favorably with the Zacks Consensus Estimate of $24.8 billion.

Earnings Estimate Revisions - Overview

Ahead of the earnings release, Zacks Consensus Estimates for the third quarter and full year are slightly down. A downward trend in estimate revision is also palpable, making the weakness in the stock more obvious.

We will now go through the details of earnings estimate revisions to substantiate why investors should be neutral on this stock.

Agreement Of Estimate Revisions

Looking at the estimate revision trends, it becomes clear that the majority of analysts are in agreement with the weak third quarter earnings outlook for JPMorgan. Of the 24 analysts covering the stock, only one has lowered the estimate for the third quarter, while none have moved in the opposite direction over the last seven days.

Also, for fiscal 2011, there were two downward estimate revisions and no upward movement. However, for fiscal 2012, one estimate revision was witnessed in either direction over the last seven days.

Magnitude Of Estimate Revisions

The Zacks Consensus Estimates for the third quarter and fiscal 2011 moved downward over the last seven days. The estimate for the third quarter dipped from earnings per share of 99 cents to 98 cents. For fiscal 2011, the estimate fell 2 cents to $4.68 per share.

Earnings Surprise

JPMorgan’s performance has been stable over the trailing four quarters with respect to earnings surprises. The average earnings surprise was a positive 10%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Our Viewpoint

Though the estimate revision trend explains that fresh investment in this stock will not be a good decision at least in the short run, one can consider JPMorgan as value investment due to its enhanced dividend-yielding nature.

In March, JPMorgan increased its quarterly cash dividend to 25 cents per share and maintained the same level during the latest dividend announcement in September.

Moreover, if an investor has the appetite to absorb risks related to market volatility, an investment in JPMorgan will not disappoint. Though the stock is not undervalued, JPMorgan’s fundamentals remain really promising.

Most importantly, despite the macro pressure on credit quality, JPMorgan’s credit metrics have been steadily improving since the last 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 the trend of improving credit quality to continue, providing more room for earnings.

However, as net interest margin (NIM) continues to remain under pressure, its traditional banking businesses may face challenges. Also, with the thrust of new banking regulations, there will be pressure on fees and loan growth could remain feeble. We expect NIM to remain depressed at least until the end of 2011.

Conclusion

The estimate revision trends and magnitude of revisions reflect a slight likelihood of downward pressure on the shares over the near term.

JPMorgan shares are maintaining a Zacks No. 4 Rank, which translates into a short-term Sell rating. However, considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.

As JPMorgan is a banking giant with exposure to almost all major banking businesses and since it is the first among the big U.S. banks to report, its results are going to be a significant indicator of performance by other important banks during the quarter.

Close on the heels of JPMorgan, among other major banks, Citigroup Inc. (C) and Wells Fargo & Company (WFC) are scheduled to report on October 17, and Bank of America Corporation (BAC) and Goldman Sachs Group (GS) will report on October 18.