JPMorgan Chase & Co. (JPM, Financial) is a $234.5 billion market cap company. JPM is set to announce its Q4 earnings on Jan.14 before the market opens. According to the below chart, since the beginning of the January 2015, JPM has outperformed the financial sector and its peers. The stock has dropped by 2.72% since the beginning of the last 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:
1. Investment Bank & Corporate
2. Commercial Banking Delivers
3. Consumer and Community Banking
4. Asset Management
5. Private Equity
Expectation from upcoming earnings report:
The Federal Reserve raised the federal funds rate by 0.25% in December 2015, following which banks raised their lending rates. JPMorgan was the first bank that raised deposit rates in January for some of its biggest clients, the Wall Street Journal reported. The investors on the Wall Street are eagerly watching out for earnings reports to grasp the impact of the interest rate hike on their financials. The current hike in interest rate is not expected to impact the top lines of banks in the fourth quarter, but it will impact earnings growth in the future. For the upcoming quarter, Wall Street analysts expect revenues of $25 billion, with a net income of $5.8 billion and EPS of $1.54 for the third quarter.
Catalysts
- Non-interest income:
JPMorgan's consumer segment was the largest contributor in both second and third quarter. It reported $10.7 billion in the third quarter compared to $8.2 billion in investment banking, $1.6 billion in commercial and $2.9 billion in asset management.
It is expected that the Fed will raise interest rates again in 2016, which may provide some relief for these banks, because they were struggling to extract revenue from interest rate segment business.
- EPS:
Analysts are expecting JPMorgan to post revenue of $5.8 billion for the fourth quarter, which translates to an EPS of $1.54. With the hike rates of 25 basis points, the trading incomes of the major banks are expected to improve slightly. In the past few quarters, bank earnings suffered due to the Federal Reserve postponing rate increase and decrease in the demand of some loans; however, after considering the strengthened U.S. condition, analysts are projecting there will be a rise in JPMorgan’s earnings to improve as demand for loans increase.
- Improvement in profitability ratios:
Analysts are expecting that JPMorgan will post a ROA of 0.97% and ROE of 9.9%, which is higher than the year-ago quarter of 9%. JPMorgan reported $1.3 billion as litigation expenses in Q3 2015, which includes the fines already paid and provisions made for the future.
The key measure to remain profitable in an uncertain and volatile environment for banks is its expense control, in which JPMorgan is better than its peers. In the previous quarter, the overhead ratio of banks rose to 67% from 61% of Q2 2015. This ratio was reported to 68% during Q4 2014, but analysts are expecting this ratio will be lower in Q4 2015 in comparison to last quarter. In the last quarter, JPMorgan`s corporate and investment bank segment had the highest overhead ratio of 75% compared to its other segments.
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 2.43%, compared to a decline of 9.61% for XLF. With an average consensus price target of $87.07 (Graham Number) and a median target estimate of $74, it’s still at a discount of 33% 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 10.03, lower than the industry median of 11.12. The price-to-book multiple is 1.06x, while the average price-to-book multiple for banks in the Financial Select Sector SPDR ETF is 1.13x. Thus, the bank is slightly cheaper than the industry.
With 32.6 million shares in his portfolio, James Barrow (Trades, Portfolio) is still 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 Q1 2011:
Note:
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While writing this research, I do not own any stock of this organisation, nor do I have any plans to invest in the above mentioned stock for next 72 hours.
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