Earnings Preview: JPMorgan - Analyst Blog

JPMorgan Chase & Co. (JPM) is scheduled to report its fourth quarter and full year 2010 results before the market opens on Friday, January 14, 2011. The Zacks Consensus Estimate for the fourth quarter is $1.00 per share, representing growth of about 35% over the year-ago quarter. For the full year, the Zacks Consensus Estimate stands at $3.85 per share, which implies a growth of about 72% over the prior year.

Improvement in equity markets and a reduction in reserves for future losses are primarily expected to benefit the quarter's results. We also expect investment banking to be a major contributor to total revenue. However, slothful customer trading in fixed income, currencies and commodities are anticipated to be a drag on the bottom line.

Previous Quarter Performance

JPMorgan's third quarter earnings came in at $1.01 per share, substantially ahead of the Zacks Consensus Estimate of 91 cents. Results also soared from 82 cents earned in the second quarter.

The better-than-expected numbers were primarily supported by a slowdown in provision for credit losses, which more than offset a pressure on trading revenues, investment banking revenues and non-interest income. Strong mortgage loan production by Retail Financial Services, higher Card Services sales volume and strong net inflows in Asset Management were also impressive during the quarter.

Managed net revenue for the quarter came in at $24.3 billion, down 15% from $28.8 billion in the year-ago quarter.

Earnings Estimate Revisions - Overview

Ahead of the earnings release, estimates have moved up slightly. The estimate revision trends and the magnitude of such revisions justify the potency in the stock. We will now go through the details of the earnings estimate revisions to substantiate investor push toward this stock.

Agreement of Estimate Revisions

Looking at the estimates revision trends, it becomes clear that a majority of analysts are in agreement with the higher fourth quarter earnings outlook for JPMorgan. Three analysts have raised their estimates for the fourth quarter of 2010, while no downward revisions were witnessed over the last 7 days.

For FY2010, there were 4 upward estimate revisions, while none revised the estimates downward. However, for FY2011, 2 analysts have lowered their estimates and 2 moved in the opposite direction over the last 7 days.

Magnitude of Estimate Revisions

Estimates for the fourth quarter improved from operating earnings of 99 cents per share to $1.00 over the last 7 days. Also, estimates for FY2010 moved up from earnings per share of $3.84 to $3.85. For FY2011, estimates remain unchanged at 4.64. The magnitude of the upward estimate revisions explains why adding JPMorgan to an investor's portfolio is 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 26%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

JPMorgan: A Trustworthy Stock?

Business diversification is helping JPMorgan achieve earnings stability in the ongoing economic recovery. The spread of its portfolio may prove to be as much of a positive duringthe recovery as it was during the downturn. Within traditional banking, a diversified product portfolio has better chances of sustaining thanmany other banks, which have exited some of these areas.

The company is also on track with respect to international expansion. By recruiting talented employees, JPMorgan continues to strengthen its asset management business in Asia and other emerging markets.

We think that JPMorgan is in a relatively good shape from a capital perspective. Management remains focused on managing asset levels efficiently during this recovery phase of the economy.

On the flipside, though the company has been witnessing an improvement with respect to provision for credit losses in the recent quarters, a continued weakness in the credit environment will largely mar the positive effects.

Earnings in the Commercial Banking and Treasury & Securities Services segments could decline going forward due to the impact of tighter spreads in a low interest rate environment or a decline in the level of liability balances. An expected high level of consumer credit portfolio loss will also be a headwind to the overall profitability.

However, the confluence of strong client inflows, growth in credit cards and investment products along with steady international expansion will usher meaningful revenue opportunities in time.

On Tuesday, the CEO of JPMorgan, Jamie Dimon, commented in an interview on CNBC that the company will soon increase its annual dividend to the range of 75 cents to $1 per share. The dividend hike is expected in the second quarter of 2011.

According to Dimon, once the Federal Reserve completes its stress tests on the large U.S. banks and gives its approval, JPMorgan will be among the first U.S. banks to increase its dividend.

Conclusion

The estimate revision trends, magnitude of revising the estimates and higher number of upward estimate revisions clearly portray the potential for significant upward pressure on the shares over the near term.

As JPMorgan is a banking giant with exposure to almost all the 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 major banks during the quarter.

JPMorgan shares 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.

Close on the heels of JPMorgan, among other major banks, Citigroup (C) is scheduled to report on January 18, Goldman Sachs (GS) on January 19 and Morgan Stanley (MS) on January 20.

 
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
 
Zacks Investment Research