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JPMorgan Earnings Preview: The Trendsetter for the Big Financials

Saturday - 4/6/2013, 3:35pm  ET

Most investors who follow the markets closely know that “earnings season” begins with Alcoa’s report, which happens to be on Monday.  The first earnings report in each sector tends to set the tone for that sector over the next few weeks, and can give us clues as to what we should expect for similar companies. 

On that note, the first major financial company to report is JPMorgan Chase & Co. , which is set to report next Friday, April 12.  Since peaking at around $51 per share in mid-march, JPMorgan has pulled back by almost 9%.  With this recent pullback, should investors go long before earnings, or is it best to wait?

Regular readers of mine know that JPMorgan is one of my favorite companies, and one that I have been bullish on for some time now.  I think that JPMorgan did a fantastic job during the financial crisis of positioning themselves for success as the economy recovers.  The acquisitions of the assets (but not all of the liabilities) of Bear Stearns and Washington Mutual for a fraction of their intrinsic value allowed JPMorgan to expand its global footprint and grow its market share.

Valuation

On a valuation basis, JPMorgan looks fantastic.  Shares trade for just 9.1 times TTM earnings, which are projected to grow at a 6% average rate over the next several years, a projection that I think is very conservative. 

The shares also pay a very nice dividend yield.  It was recently announced that beginning in the second quarter, the dividend will rise from 30 cents to 38 cents per share, meaning that JPMorgan is now yielding almost 3.2%.

JPMorgan’s Earnings Trends

Last time JPMorgan reported, they surprised the market by reporting net income of $1.39 per share, up from 90 cents per share a year ago.  In fact, they have beat estimates for the past three quarters, and 11 out of the past 12.  Even though estimates have been gradually adjusted higher over the past several months, I would say that there is more than a 50/50 chance for JPMorgan to surprise to the upside again.  After all, 6% annual growth projections are pretty conservative!

Other Upcoming Announcements

As mentioned earlier, since JPMorgan is the first major financial company to report, they have the ability to help shape expectations for the rest of the sector.  What I mean by that is that, for example, if loan originations are surprisingly strong for one bank, odds are that other banks had similar luck over the same time period.

Other banks that report in the days following JPMorgan include Citigroup on April 15 and Goldman Sachs  the following day.

Let’s begin with Goldman, since they are usually mentioned in the same conversations as JPMorgan.  Analysts seem to have somewhat lower expectations for Goldman, projecting first quarter earnings of $3.84 per share, down 2% from last year.  However, in their last earnings report, Goldman blew the expectations away by 51% ($5.70 reported, $3.60 expected).  Goldman has historically been tough for analysts to get a read on, and I wouldn’t be surprised if the actual earnings numbers and the analysts’ projections are two very different things.

Citigroup is shaping up to be quite the turnaround story.  More important than the current quarter’s numbers will be the bank’s outlook for the future.  Currently the consensus calls for FY14 earnings of $5.23, which would be considerable improvement over the past 12 month’s earnings of $2.49.  Additionally, pay attention to any updates on Citigroup’s international business, particularly in Latin America, which grew by 8.5% last year.

Buy or Not Buy?

As far as JPMorgan goes, I do believe that it is the best-in-breed in the big banks.  After the recent pullback, it may be worth considering this as an entry point, especially if you believe that the company’s trend of surprising analysts with stellar results will continue.

This article was originally published as JPMorgan Earnings Preview: The Trendsetter for the Big Financialson Fool.com

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