JPMorgan (JPM) Holds the Key: Will It Beat Earnings? - Analyst Blog

JPMorgan Chase & Co. JPM is scheduled to release its first-quarter 2014 results tomorrow, Apr 11, before the opening bell. Too many questions linger in investors' minds this time around given the tough backdrop that banks have been enduring since the year started. After all, this banking superstar holds the key to investors' confidence in the industry.   

In the fourth quarter, the banking behemoth managed to report earnings and beat market expectations, after covering huge legal costs. In other words, it survived the pressures only because of its sufficient legal reserves.
 
The banking giant came out with earnings of $1.30 per share after shelling out legal costs to deliver a 4% surprise. The strength of its legal reserves made this return to positive earnings surprise possible.

Will JPMorgan be able to maintain this turnaround story this time too after combating the challenges that the industry witnessed during the quarter? Let's see what factors might have sketched the earnings report this time around.

How Things Have Shaped Up?
 
JPMorgan continued to hit headlines, but not always for wrong doings and related settlements like in the past few quarters. However, another set of dampeners – dreary consumer and corporate activities, soft trading volumes and sluggish mortgage banking activities – are likely to drag earnings in this report.
    
Dumping unprofitable businesses and concentrating on those with strong potential should be of some help. Vending of the physical commodities business for $3.5 billion last month brought some much-needed proceeds that should ultimately translate into better key numbers for the bank.

Another defensive action – workforce reduction – has become the bank's key instrument to deliver impressive bottom-line numbers. In February, the company announced that it would lay off 8,000 workers (about 3% of its total workforce) in its consumer and mortgage banking segments this year. Last year, JPMorgan already cut 16,500 jobs in these segments.

However, these efforts might not be able to make up for the shortfall that it has been witnessing on the top line part. We don't expect any significant increase in interest income due to sluggish loan growth and a nagging low rate environment. If any improvement is seen, it will be solely due to the company's strength across product lines. But we don't expect this growth to be significant enough to offset all downsides.     

Most importantly, this banking giant failed to impress analysts with its level of activities during the quarter. The weakness surrounding the industry and the company's highly sensitive financials to such negatives forced many analysts to significantly lower their earnings estimates. The Zacks Consensus Estimate has moved down by 2.1% to $1.41 per share over the last 7 days, as the tendency for a downward estimate revision was more obvious.

Earnings Whispers

Our proven model does not conclusively show that JPMorgan is likely to beat the Zacks Consensus Estimate in the first quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  The Earnings ESP for JPMorgan is -2.13%. This is because the Most Accurate estimate stands at $1.38 while the Zacks Consensus Estimate is higher at $1.41.
 
Zacks Rank: JPMorgan's Zacks Rank #3 increases the predictive power of ESP. But we also need to have a positive ESP to be confident of an earnings surprise call.  

Stocks That Warrant a Look

Here are a few bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Wintrust Financial Corp. WTFC has an earnings ESP of +3.03% and carries a Zacks Rank #2 (Buy). It is scheduled to report results on Apr 15.

The PNC Financial Services Group, Inc. PNC has an earnings ESP of +2.41% and carries a Zacks Rank #3. It is scheduled to report results on Apr 16.

The earnings ESP for BankUnited, Inc. BKU is +6.82% and it carries a Zacks Rank #2. The company is expected to release results on Apr 23.

In the banking sector, JPMorgan will be kicking off the first-quarter earnings season with Wells Fargo & Co. WFC. Therefore, the release will give a good sense of how taxing or encouraging the quarter has been for the key banking sector.