JPMorgan Chase & Co. (NYSE:JPM - News) is scheduled to report its fourth quarter and full year 2011 results before the market opens on Friday, January 13. The Zacks Consensus Estimate for the quarter is 92 cents per share, representing an estimated year-over-year slump of about 18%. For the full year, the Zacks Consensus Estimate is $4.50 per share, up about 14% from the previous year.
We don’t expect JPMorgan to report extraordinary numbers this quarter as it is wont to do given the weakness at large in the economy and the fundamental pressures on the banking sector.
Among the fundamental challenges, JPMorgan has been fighting with poor capital market revenues, weak loan demand, low liquidity and a tough regulatory environment. Also, weak investment banking activity and retail performances along with volatile equity markets might drastically mar results. However, reduction in reserves for future losses and strong credit trends in its credit card and wholesale business are expected to counter the negatives.
Previous Quarter Performance
JPMorgan’s third quarter earnings per share of $1.08 surpassed the Zacks Consensus Estimate of $0.93. Results were also better than $1.01 earned in the prior-year quarter.
Considering certain significant nonrecurring items, JPMorgan reported a net income of $4.3 billion or $1.02 per share, compared with $4.4 billion or $1.01 per share in the year-ago quarter.
The better-than-expected numbers were primarily backed by a slowdown in provision for credit losses and slightly higher net revenue, which more than offset an increase in non-interest expense and lower net interest income.
Managed net revenue of $24.4 billion in the reported quarter was at par with the year-ago quarter. But the figure compared favorably with the Zacks Consensus Estimate of $23.8 billion.
Earnings Estimate Revisions - Overview
Ahead of the earnings release, Zacks Consensus Estimates for the fourth quarter and full year are slightly down. A significant downward trend in estimate revision is also palpable, making the weakness in the stock more obvious.
We will now discuss the details of earnings estimate revisions to substantiate why short-term investors should not be buoyant on this stock.
Agreement of Estimate Revisions
The estimate revision trends conform that the majority of analysts are in cahoots about a weak fourth quarter earnings at JPMorgan. Of the 22 analysts covering the stock, 6 have lowered their estimates for the fourth quarter, while only one has moved in the opposite direction over the last 7 days.
Also, for the full year 2011, there were 7 downward estimate revisions and 1 upward movement. For full year 2012, 6 downward revisions were witnessed again while none moved north over the last 7 days.
Magnitude of Estimate Revisions
The Zacks Consensus Estimates for the fourth quarter and full year 2011 headed south over the last 7 days. The Zacks Consensus Estimate for the fourth quarter dipped from earnings per share of 94 cents to 92 cents. For full year 2011, the estimate also fell 2 cents to $4.50 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 9%. 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 indicates that fresh investment in this stock will not be a good decision, at least in the short run, one can consider a company like JPMorgan as value investment due to its steady dividend-yielding nature.
In March last year, JPMorgan increased its quarterly cash dividend to 25 cents per share and maintained the same level during the latest dividend announcement in December.
Moreover, an investor with the appetite to absorb risks related to market volatility should not be disappointed with an investment in JPMorgan over the long haul. Though the stock is not at all undervalued, JPMorgan’s fundamentals remain highly promising with a diverse business model and a strong balance sheet.
Most importantly, despite the macro pressure on credit quality, JPMorgan’s credit metrics have been steadily improving since the final 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 bottom-line improvement.
Though there are increasing concerns related to the European economy, equity-centric activities in the U.S. are expected to support JPMorgan’s results in the upcoming quarters with the continuous recovery of the capital markets.
Yet, net interest margin (NYSE:NIM - News) continues to remain under pressure, affecting the traditional banking businesses. Also, with the thrust of new banking regulations, there will be pressure on fees and loan growth could remain feeble.
Conclusion
Going by estimate revision trends and the magnitude of revision, there is admittedly a downward pressure, though slight, on the shares over the near term.
JPMorgan shares maintain a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.
Given that JPMorgan is a banking behemoth with exposure in almost all banking businesses and is the first among the other important bankers to flag off fourth quarter results, the release is going to be a significant indicator of performance in the key banking sector.
Close on the heels of JPMorgan, the other major banks, namely Citigroup Inc. (NYSE:C - News) and Wells Fargo & Company (NYSE:WFC - News), are scheduled to report on January 17, while Goldman Sachs Group Inc. (NYSE:GS - News) will report on January 18 and Bank of America Corporation (NYSE:BAC - News) on January 19.
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