JPMorgan Chase & Co. (JPM) is scheduled to report its second quarter 2011 results before the market opens on Thursday, July 14. The Zacks Consensus Estimate for the quarter is $1.21 per share, representing a growth of about 11% over the year-ago quarter.
Same as before, it is expected that JPMorgan will surpass estimates backed by an improvement in equity markets, further reduction in reserves for future losses and strong credit trends in its credit card and wholesale businesses. However, weak trading and retail performances might mar results to some extent. Also, there are concerns related to listless customer trading in fixed income, currencies and commodities. Furthermore, expenses related to the settlement of SEC charges in the CDO deal are expected to dent results slightly.
Previous Quarter Performance
JPMorgan’sfirst quarter earnings came in at $1.25 per share, substantially ahead of the Zacks Consensus Estimate of $1.16. Results also improved from earnings of 74 cents in the prior-year quarter.
The astonishing numbers were primarily supported by a substantial slowdown in provision for credit losses and lower non-interest expense, which more than offset decreases in both interest and non-interest reserves.
Managed net revenue for the quarter came in at $25.8 billion, down 8% from $28.2 billion in the year-ago quarter. However, this compared favorably with the Zacks Consensus Estimate of $25.4 billion.
Earnings Estimate Revisions – Overview
Ahead of the earnings release, Zacks Consensus Estimates for the second quarter and full year remained stable. However, there was a downward estimate revision trend. The estimate revision trends justify a slight weakness in the stock.
We will now go through the details of earnings estimate revisions to substantiate why investors should be neutral to 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 stable second quarter earnings outlook for JPMorgan. Of the 26 analysts covering the stock, only 2 have lowered their estimates for the second quarter, while none have moved in the opposite direction over the last 7 days.
Also, for fiscal 2011, there were 2 downward estimate revisions and no upward revision. However, for fiscal 2012, there was no estimate revision over the last 7 days.
Magnitude of Estimate Revisions
The Zacks Consensus Estimates for the second quarter and fiscal 2011 have not changed over the last 7 days. However, over the last 30 days, estimates for the second quarter dipped slightly from earnings per share of $1.22 to $1.21. For fiscal 2012, estimates also moved down by one cent to $5.63 per share. The magnitude of estimate revisions explains why investors should be neutral on JPMorgan in the short run. However, adding the stock to an investor’s portfolio for a long haul will be a good decision at this point.
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 22%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
JPMorgan is Still a Good Stock
JPMorgan is now a good stock for value investors considering its enhanced dividend-yielding nature.
Following the release of Federal Reserve’s second round stress test results in March, many big banks including JPMorgan got the green signal for immediate action on raising dividends.
JPMorgan’s dividend hike and share buyback actions were prohibited in the last few years on fears that it may not have sufficient capital to counter another financial crisis.
Finally, JPMorganincreased its quarterly cash dividend to 25 cents per share in March and maintained the same level during the dividend announcement on May 17.
Moreover, if an investor has the appetite to absorb risks related to market volatility, 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. We are impressed to see improved delinquency trends across almost all consumer lending areas such as home equity, mortgage and credit card. We expect the trend of improving credit quality to continue, providing room for earnings growth.
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 till the end of 2011.
Conclusion
The estimate revision trends and magnitude of revision reflect a slight likelihood of downward pressure on the shares over the near term.
JPMorganshares are maintaining a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, 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) is scheduled to report on July 15, Bank of America Corporation (BAC), Goldman Sachs Group Inc. (GS) and Wells Fargo & Company (WFC) on July 19, and Morgan Stanley (MS) on July 21.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
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