JPMorgan Chase (NYSE:JPM) isn’t headed into its fourth quarter report in the best of circumstances. Rival Citigroup (NYSE:C) posted mixed Q4 results on Monday morning, and the echoes of last week’s downgrade of JPM stock by Jefferies analyst Ken Usdin are still ringing. Usdin’s chief concern? A premium price in front of what may well be a revenue miss like the one Citigroup just logged.
If any banking name is poised to not only top estimates but fully justify a premium valuation, however, it’s arguably JPMorgan Chase. The nation’s biggest bank (as measured by assets) is one of the few to give analysts good reason to expect solid fourth-quarter revenue growth, and JPMorgan boasts more than a dozen consecutive quarters of earnings beats.
Investors will find out how much any of that matters in less than 24 hours.
JPMorgan Chase Earnings Preview
JPMorgan will report its fourth-quarter results on Tuesday, prior to the market’s open, with its earnings conference call slated for 8:30 a.m. eastern.
As of the latest look, analysts are collectively calling for sales of $26.9 billion, up 5.7% from the year-ago top line of $25.45 billion, to drive earnings of $2.21 per share of JPM stock versus a Q4-2017 bottom line of $1.76 per share.
While most banks became more profitable over the course of 2018 against a backdrop of rising interest rates that didn’t crimp the economy, most banks also hit a revenue headwind during the fourth quarter. Wells Fargo (NYSE:WFC), which will also report its fourth quarter results on Tuesday morning, is expected to post a 1.4% dip in revenue. Citigroup’s top line last quarter rolled in at $17.1 billion, down roughly 2% and falling well short of the $17.6 billion analysts had modeled.
Citigroup topped earnings estimates, and Wells Fargo along with JPMorgan will likely do the same, In the current environment, however, investors may leave little room for anything less than reaching targets.
JPMorgan Downgraded
That’s Ken Usdin’s concern anyway, who downgraded JPM stock from a “buy” to a “bold” last week explaining “We believe the premium gained over the past year is fully justified, but would anticipate additional re-rating above the group as harder from here.”
That premium is a trailing P/E of 12.4 and a forward-looking P/E of 10.1, which is cheap on a marketwide basis, but still on the upper half of the spectrum in terms of bank stock valuations. Citigroup is only trading at 7.6 times this year’s expected per-share profits, while Bank of America (NYSE:BAC) currently trades at a forward-looking P/E of 9.2.
Jefferies’ Usdin also makes a valid point regarding the outsized performance JPM has dished out of late — even with the 16% pullback from its September peak, JPM stock is still leading any other aforementioned bank stock for the past twelve months. That leadership leaves it more vulnerable than other names in the industry.
Looking Ahead for JPM Stock
If that profit-taking is to pan out, however, it’s ultimately apt to be in response to how hard JPMorgan has hit a lull in bond trading, and how effectively the bank shrugged off the impact of falling interest rates and waning demand for loans.
Though it wasn’t unexpected, Citigroup’s fixed income trading revenue fell 21% to $1.9 billion last quarter, and was far from fully offset by the 18% increase in equity and stock trading revenue, which grew to $668 million. Citi’s consumer banking and lending business was flat, though that stagnation in and of itself cannot shrink profits.
All banks have seen profit margins and efficiency measures pressured lower again in recent months, with yields on two-year treasuries falling almost 50 basis points during the fourth quarter. Since then, mortgage rates have fallen to eight-month lows, indicating slumping demand that jibes with fading home-purchase activity. During the final week of last year, mortgage applications fell nearly 10% year-over-year.
Also working against JPM stock headed into Tuesday’s news is October’s third-quarter report, which was better than most bank reports for the quarter, but may have subsequently set the bar too high … as Usdin noted.
Bottom line: If JPM stock is to hold its ground, JPMorgan will have to convince investors it executed better than other banks did last quarter. It did so for the better part of 2018, but mindsets and perception have changed since then.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
