Buy JPMorgan Chase on It’s Strong Earnings Performance

by Ed Elfenbein | January 21, 2013 9:00 am

JPMorgan NYSE:JPMI wish I could take massive amounts of credit for predicting JPMorgan’s (NYSE:JPM[1]) earnings beat last week, but honestly, it wasn’t hard to see. Anyone paying attention could see how their business was improving.

For the fourth quarter, JPM earned $1.39 per share, which was up from 90 cents per share in the fourth quarter of 2011. It was also well above Wall Street’s consensus of $1.20 per share. This was a strong quarter across the board. CEO Jamie Dimon said, “The firm’s results reflected strong underlying performance across virtually all our businesses for the fourth quarter and the full year, with strong lending and deposit growth,”

Breaking down the numbers, quarterly revenue jumped 10% to $21.5 billion. For the year, JPM made a profit of $21.3 billion from revenue of $97 billion. This bank is absolutely enormous. It’s more than 1,000 times larger than our beloved Nicholas Financial (NASDAQ:NICK[2]). I’m showing you these numbers because much of the true story about JPMorgan gets lost in the headlines.

Let me explain. Earlier this year, the bank took a $6 billion bath thanks to bone-headed trading out of its London office from the infamous “London Whale.” Yes, that was a terrible, terrible episode[3], and heads should roll. The point I tried to make last year is that even a gigantic loss like that is still manageable for a titan like JPM.

But when the London Whale news broke, investors panicked and rushed for the exits. In just five weeks, the shares plunged from $44 to $31. Bear in mind that this was only a few weeks after the company quintupled its dividend. Fortunately, we held on and JPM has been a big winner for us. As well as it’s done for us, I still think the stock is a bargain.

Digging deeper in the earnings report, I was particularly impressed by JPM’s strength in the mortgage sector. Fees from their mortgage business climbed from $723 billion in Q4 of 2011 to just over $2 billion in Q4 of 2012. Bernanke and Co. are clearly making a difference. JPM set aside a smaller amount for mortgage loan losses than Wall Street had expected.

This line in the income statement always seems to drive some folks batty, but making provisions for loan losses is what banks do. They can either do too much or too little. They’re never going to be exactly right. I’m going to give a bank that didn’t report a single quarterly loss during the financial crisis the benefit of the doubt.

I also noticed that in JPM’s credit-card business, loans delinquent over 30 days fell from 2.81% a year ago to 2.1% now. That’s a very good sign. On the negative side, the bank took a big $700 million charge in Q4 for the mortgage-abuse settlement that was announced recently.

Here’s how I see JPMorgan. It’s a solid bank. The stock is cheap. Business is doing well, and profits are growing. The problem is that the bank has a poor reputation, and not all of that is unfair. Jamie Dimon is a talented leader, but he’s a loudmouth. He was a good leader during a crisis, but now I think Jamie should depart[4] so JPM can work on rebuilding its image. He can still be on the board, but the bank needs a new public face. Preferably one that’s a little boring.

On Thursday, shares of JPM got as high as $46.87, which is the highest level since April 13, 2011. Due to this strong earnings report, I’m raising my Buy rating on JPM. This is an excellent stock. One more thing: Expect to see a dividend increase in a few weeks.

  1. JPM:
  2. NICK:
  3. a terrible, terrible episode:
  4. Jamie should depart:

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