JP Morgan Stock is Up 13% Since Earnings, What's Next for JPM?

A month has gone by since the last earnings report for JP Morgan Chase (JPM). Shares have added about 13.21 % in the past month,in that time frame.

Will the recent positive trend continue leading up to their next earnings release, or is the stock due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts for JPM investors.

Recent Earnings

 

JPMorgan Q3 Earnings Easily Top on Solid Trading & Lending

Driven by improved trading and mortgage banking revenues, JPMorgan’s third-quarter 2016 earnings of $1.58 per share handily surpassed the Zacks Consensus Estimate of $1.40. However, the figure reflects a 6% decline from the year-ago period. Notably, the results included a legal benefit of $71 million.

Improved fixed income and equity trading revenues, higher mortgage banking fees and growth in investment banking income drove the results. Further, higher net interest income, perhaps attributable to the rise in loan supported top line.

The overall performance of JPMorgan’s business segments, in terms of net income generation, was impressive. All segments, except Corporate and Consumer & Community Banking, reported a rise in net income on a year-over-year basis.

Higher Trading & Mortgage Banking Revenues, Lower Costs

Managed net revenue of $25.5 billion in the quarter was up 8% from the year-ago quarter. Also, it compared favorably with the Zacks Consensus Estimate of $24 billion. A 48% jump in fixed income markets revenue and 21% growth in mortgage banking income were the primary reasons for top-line improvement.

Non-interest expense was $14.5 billion, 6% lower than the year-ago quarter. The decline was primarily due to lower legal expenses and consistent cost-reduction initiatives, partially offset by a rise in compensation costs.

Credit Quality: A Cause of Concern

JPMorgan’s credit quality deteriorated during the quarter. As of Sep 30, 2016, non-performing assets were $7.8 billion, up 7% from the year-ago period.

Net charge-offs were up 16% year over year to $1.1 billion. Further, provision for credit losses surged 86% year over year to $1.3 billion, primarily due to increases in consumer reserves.

Fourth Quarter 2016 Outlook

Management anticipates a modest rise in NII on a sequential basis on the back of continued growth in loans. Further, managed non-interest revenue is expected to decline sequentially, reflecting projected a fall in markets revenue, seasonally lower Mortgage Banking Revenue and higher Card new account origination costs.

Specifically, Securities Services revenue is likely to be nearly $875 million, depending on market conditions. In Card, Commerce Solutions & Auto, revenue is expected to fall roughly $200 million on a sequential basis, due to higher Card new account origination costs on strong, but slowing demand for Sapphire Reserve through fourth-quarter 2016. In addition, investment banking fees are anticipated to be down sequentially but relatively flat year on year.

Operating expenses are projected to be essentially flat.

On the assumption that there will no further deterioration in oil prices, management expects no additional significant reserve builds for energy sector loans.

2016 Outlook

With the December rate hike and the expected loan growth, the company projects to deliver about $2–$2.5 billion increase in NII. Further, total non-interest income will be around $50.5 billion (almost stable on a year-over-year basis).

On the expense front, management expects adjusted expenses to be nearly $56 billion (relatively stable on a year-over-year basis),

Management projects average core loan growth to be around 15% year over year.

Given the stress in the energy sector and loan growth, the company projects NCOs to be roughly $4.75 billion, up year over year. Further, the company is expected to build reserves for auto loan portfolio.

How have estimates been moving since then?

Following the release and in the last month, investors have witnessed an upward trend for fresh estimates. There have been seven revisions higher for the current quarter compared to one lower in the time frame. Overall, it looks like things are starting to turnaround for JPM on this front. 

 

JPMORGAN CHASE Price, Consensus and EPS Surprise

JPMORGAN CHASE Price, Consensus and EPS Surprise | JPMORGAN CHASE Quote

 

VGM Scores

At this time, JP Morgan's stock has a poor Growth score of 'F', but its momentum is doing a lot better with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy. JPM has a poor historical EPS growth level of about 4.74 %. From a momentum outlook, it is worth noting that the stock has good earnings estimate momentum which includes rising estimates, putting the stock into 'B' territory from this look.

The company's stock is suitable soley for momentum based on our styles scores.

Outlook

With estimates broadly trending higher for the stock, the near term looks promising for JPM investors. Based on this, it shouldn't be shocking to note that JPM has a Zacks Rank # 2 (buy) and we are expecting outperformance from JPM in the next few months.

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