JPMorgan Chase & Co. (NYSE:JPM) is a $228.99 billion market cap company. JPM is set to announce its Q3 earnings on Oct. 13 after the market close. According to the below chart, since the beginning of the January, JPM has outperformed the financial sector and its peers. The stock has dropped by -1.04% since the beginning of the year.
Company overview:
JPMorgan is a financial holding company, and one of the largest banks by assets in the U.S. The company operates in five segments:
- Investment Bank & Corporate
- Commercial Banking Delivers
- Consumer and Community Banking
- Asset Management
- Private Equity
Expectation from upcoming earnings report:
With the Federal Reserve deciding to keep the federal funds rate unchanged, U.S. banks could earn lower returns on their assets. Thus, to remain profitable, banks are focusing on boosting non-interest income. For the upcoming quarter, Wall Street analysts expect revenues of $25.5 billion with a net income of $5.9 billion and EPS of $1.60 for the third quarter.
Catalyst:
1)Â Non-interest income
The consumer segment is the largest contributor to net revenues. In the second quarter, it reported $11 billion compared to $8.7 billion in investment banking, $1.7 billion in commercial and $3.1 billion in asset management.
To offset the revenue loss from interest sensitive businesses, banks can choose channels that generate non-interest income, such as investment banking and asset management. In Q2 2015, JPMorgan generated $13.1 billion from non-interest income, which is half of its revenue.
2)Â Earnings per share:Â
Analysts are expecting JPMorgan to post revenue of $5.9 billion for the third quarter, which translates to an EPS of $1.60. The trading incomes of the major banks are expected to suffer, due to the Federal Reserve postponing a rate increase.
3)Â Improvement in profitability ratios:
Despite a 6% dip in its top line revenues, JPMorgan's Q2 profit increased by 10% and it was mainly due to the bank’s continued efforts to trim operating expenses. JPMorgan reported $500 million less than the expected estimate of $14.7 billion, while its overhead ratio declined by 2% and ROE was constant at 11%. Analysts expect that in the third quarter, JPMorgan will post ROE of 10.6% and ROA of 0.99%.
The chart below compares the JPMorgan stock price with XLF, which represents the U.S. financial sector. Year to date, shares of JPMorgan have declined 1.04%, compared to a decline of 6.2% for XLF. With an average consensus price target of $74 and a median target estimate of $79, it’s still at a discount of 27.6% versus analyst expectations. This suggests that Wall Street is upbeat about the stock despite the recent correction.
Valuation:
Relative valuation
JPMorgan has a P/E of 11.18, lower than the industry median of 12.81. The price-to-book multiple is 1x, while the average price-to-book multiple for banks in the Financial Select Sector SPDR ETF is 1.1x. Thus, the bank is slightly cheaper than the industry.
With 33.3 million shares in his portfolio, James Barrow (Trades, Portfolio) is JPMorgan's leading guru shareholder. Others include Ken Fisher (Trades, Portfolio) and Bill Nygren (Trades, Portfolio).
James Barrow's (Trades, Portfolio) holding in JPM stock since Q4 2010:
Note:
The first image of financial performance is subject to copyright of Marketrealist.com, and the other two are subject to copyright of GuruFocus.com.
