JPM With Nobias Technology: Case Study on J.P.Morgan
J.P. Morgan (JPM) shares are down 18.91% on a year-to-date basis. During the last 30 days, JPM shares are down 6.16%. Although JPM has been surrounded by negative sentiment (from traders) throughout 2022, the credible authors and analysts tracked by the Nobias algorithm maintain a bullish bias on shares. The company reported Q1 earnings last week. Richard Saintvilus, a Nobias 4-star rated author, published an earnings preview piece at Nasdaq.com.
Saintvilus wrote, “Offering a nice mix of earnings growth, income and value, JPMorgan Chase (JPM) has enjoyed a well-deserved reputation as being the best-executing bank among its peer group. However, its business is intricately tied to the U.S. and to some extent, the global, economy, given its status as the country’s largest bank.”
Regarding the bank’s near-term prospects, he noted, “inflationary pressures on consumers presents a potential headwind, though consumer balance sheets are currently strong and bookended by wage increases.” He also said, “the Federal Reserve has begun to raise interest rates, which bodes well for JPMorgan’s top and bottom forecasts and its net interest margins.”
JPM April 2022
Saintvilus touched upon some of the rationale spurring the negative sentiment that has recently surrounded JPM shares saying, “During its Q4 conference call, JPMorgan management spooked investors by forecasting operation expenditures that were significantly higher than analysts expected. The management team has a solid reputation for capital deployment, and thus I believe the spending should be viewed more as “investments” that are intended to help the bank maintain its leadership position and its ability to outperform its peer group.”
However, he wrote, “High double-digit returns from banks is not out of the question as the Fed being [sic] to raise rates and unwind asset purchases. Combined with its 2.50% dividend yield, which has grown at an average of almost 8% over the last five years, JPMorgan looks like a solid opportunity ahead of earnings.”
Speaking about JPM’s Q1 earnings potential, he said, “For the three months that ended March, analysts expect the New York-based bank to earn $2.69 per share on revenue of $31.08 billion. This compares to the year-ago quarter when earnings came to $4.50 per share on revenue of $30.52 billion.”
BOOX Research, a Nobias 4-star rated author, also touched upon Wall Street’s estimates for Q1 in a recent article, but also highlighted another piece of data: J.P. Morgan’s historical outperformance. BOOX Research wrote, “One of the curiosities about JPM is that the company has a strong record of beating the earnings estimates. Over the past 5 years, quarterly EPS has come in above the consensus in 17 of the last 20 quarters. On the revenue side, the history has been more variable but the point here is to say that it's a good bet that JPM can beat what we view as a low bar of expectations, or at least that the headline results won't have too many surprises.”
Ultimately, however, BOOX maintained a neutral stance on the stock, concluding, “We rate JPM as a hold with a price target for the year ahead at $150.00 per share representing a 13.5x multiple on the current 2022 consensus EPS. While our price target is about 12% higher than the current share price, it's not enough upside in our view to take an aggressively bullish position.”
When JPM reported Q1 results on April 13th, 2022, the company missed Wall Street’s expectations on the bottom-line, but the company managed to beat them on the top-line. JPM reported Q1 revenue of $30.7 billion, beating the consensus estimate by $170 million. This $30.7 billion sales result represented -5.0% year-over-year growth. JPM reported non-GAAP earnings-per-share of $2.63, which missed Wall Street’s expectation by $0.07.
Librarian Capital, a Nobias 4-star rated author, covered the JPM results in a recent article published at Seeking Alpha. They wrote, “JPM's Q1 2022 EPS was 41.4% lower year-on-year and 21.0% lower sequentially, but the underlying trends were actually positive”. They continued, breaking down JPM’s primary metrics. Librarian Capital said that the following metrics were “Normalizing” during Q1.
“Non-Interest Revenues were down 12.4% year-on-year (though up 5.9% from Q4 2021), including double-digit declines in Investment Banking Fees, Principal Transactions, Investment Securities Gains, Mortgage Fees & Related Income and Card Income. The first four can be attributed to an exceptional prior year, while Card Income fell due to higher new account acquisition costs as JPM invests to grow its Card business:”
”Net Interest Revenues grew 7.5% year-on-year and 1.9% from Q4 2021, with improvements in both loan balances and Net Yields (more below).”
“Non-Interest Expense grew 2.5% year-on-year, with structural growth and investments in the cost base offset by lower revenue-related costs.”“Pre-Provision Pre-Tax Profit, which excludes one-off reserve builds/releases, was 13.9% lower than the prior year, but slightly higher than both the preceding quarter than the (mostly) pre-COVID Q1 2020”.
“Provision for Credit Losses was positive $1.46bn, compared to negative figures of $4.16bn in Q1 2021 and $1.29bn in Q4 2021. This consisted of $0.6bn of Net Charge-Offs, no worse than prior quarters, and a reserve build of $0.9bn, compared to large releases before”
“The number of shares was down 3.3% year-on-year but flat sequentially, due to Q1 being the quarter when share incentives are recorded. JPM spent $2.5bn to repurchase 18.1m shares in Q1, but this was offset by 11.0m shares issued for employee compensation.”
“Return on Tangible Common Equity was 16%, lower than prior periods but in line with our (long-term average) assumption.”
“The Common Equity Tier-1 ("CET1") ratio was 11.9%, down from 13.0% in Q4, but near the top of management’s 11-12% target range. It was kept high in the preceding quarter to absorb anticipated charges.”
The author continued, saying that the follow metrics were “Stable, Excluding COVID Boost”:
“Consumer & Community Banking revenues were down 2.3% year-on-year, as higher revenues in Consumer & Business Banking (from higher deposits and client assets) were offset by lower revenues in Home Lending (mortgage activity was high last year due to low rates) and in Card & Auto (higher Card account acquisition costs, lower Auto volumes due to vehicle shortages).”
“Corporate & Investment Banking revenues were down 7.4% year-on-year, primarily due to much lower Investment Banking ("IB") fees for both Debt (down 20%) and Equity (down 76%) underwriting. IB Advisory fees were up, and Markets revenues were only 3% lower year-on-year. There was also a $524m loss in Credit Adjustments & Other, due to spreads widening and credit valuation adjustments (including on Russia-related exposure).”
“Commercial Banking revenues were up 0.2% year-on-year, with lower IB revenues being offset by higher payments revenue and deposits.”
“Asset & Wealth Management revenues were up 5.8% year-on-year, due to growth in deposits and loans, higher management and performance fees, and the absence of valuation gains in the prior year.”
Ultimately, the author concluded, “We upgrade our rating on JPMorgan Chase & Co. stock to Buy.” Librarian Capital laid our their bullish thesis saying: “Q1 results support the 16% Return on Tangible Common Equity we assume. With shares trading at 1.8x Tangible Book Value, this implies a 11.3x P/E. With shares at $126.12, we expect an exit price of $198 and a total return of 73% (16.8% annualized) by 2025 year-end.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Bram Berkowitz, a Nobias 4-star rated author, also recently published a bullish article on J.P. Morgan highlighting a specific area of the company that he expects to outperform. Berkowitz touched upon a series of headwinds impacting major financial institutions like JPM, but ultimately arrived at an attractive catalyst for shares, saying, “A lot of conflicting factors, such as rising interest rates, the normalization of credit, inflation, and Russia's ongoing invasion of Ukraine, could continue to make earnings unpredictable this year. However, one division at JPMorgan Chase that looks like it may perform better than initially expected this year is the corporate and investment bank (CIB).” He continued, “JPMorgan's CIB generated roughly $13.5 billion of revenue in the first quarter of this year, down about $1.1 billion from the remarkable first quarter of 2021 but up nearly $2 billion from the previous quarter.”
Berkowitz points out that there are headwinds for JPM’s CIB operations, writing, “One area of CIB that struggled a lot, however, is investment banking, which includes M&A Advisory and equity and debt underwriting. The struggles are not a surprise, as the volatile markets and war in Ukraine have brought M&A and initial public offerings (IPOs) to a screeching halt.” It’s unclear as to when M&A activity is going to pick back up (largely due to macro uncertainty and shaky management confidence sentiment); however, Berkowitz said, “Ultimately, equity and fixed-income trading is looking better than anticipated, while investment banking is struggling but perhaps will pick up later this year if conditions improve. On a net-net basis, I expect CIB revenue to come in better than initially thought this year.”
Overall, the vast majority of credible authors that we track with the Nobias algorithm share this bullish outlook while analysts are neutral. 92% of recent articles published by credible authors have included a “Bullish” bias. Of the credible Wall Street analysts that we track (only those with 4 and 5-star Nobias ratings) the average price target being applied to JPM shares right now is $154.33. Today, JPM shares trade for $131.12/share, meaning that this average price target implies 17.7% upside potential.
Disclosure: Nicholas Ward has no JPM position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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