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The news flow we hunger for is starting on Tuesday, July 14. That is when JPMorgan JPM Chase, the largest U.S. bank, leads off the second quarter earnings report season by serving up a 3-course meal of information and insights.
At 6:45 AM ET, the appetizer: The written financial report for the second quarter through June 30
At 8:30 AM ET, the main course: The conference call presentation and fulsome explanation of those results and how they evolved
Following, the dessert: Analysts and management will explore the insights and expectations of what comes next, along with how the bank is positioning itself. During this course, CEO Jamie Dimon will provide key commentary about the prospects, the risks, the dynamics and the milestones.
Once the conference call is completed, the Federal Reserve, Wall Street professionals and investors (among others) will ponder the takeaways. Likely, this will mean a partial reduction in uncertainties – particularly about where things could be headed, how long the adverse conditions might last and how best to prepare for what could be coming.
The reported earnings are of secondary interest
Obviously, JPMorgan is not immune to the adverse conditions most every business must contend with. Analysts are perhaps the most challenged, saddled with the task of forecasting earnings with limited company guidance. The result is a wide spread of individual analysts’ earnings estimates.
Even now, with the second quarter already sewn up, the numbers are kept secret. Analysts, like everyone else except JPMorgan’s executives and selected staff, remain in the dark about the company’s results. Therefore, until the July 14 announcements, the wide range of estimates will remain, with the single “consensus” number being the analyst estimate for the quarter.
This secrecy is a standard and regulated practice. Its success is exhibited by the last five quarters’ results showing large “surprise” differences between the estimated and actual numbers:
The actual results:
2019
- 1st quarter $2.32 estimate, $2.65 actual +14.2% surprise
- 2nd quarter $2.50 estimate, $2.82 actual, +12.8% surprise
- 3rd quarter $2.44 estimate, $2.68 actual, +9.8% surprise
- 4th quarter $2.32 estimate, $2.57 actual, +10.8% surprise
2020
- 1st quarter $1.70 estimate, $0.78 actual, (54.1)% surprise
The forecast results (source: Zacks.com)
Not included in those previous comparisons is the other source of uncertainty – the range of individual analyst forecasts. As shown below, the breadth makes the current estimates of little use. (Note especially the 2020 year forecast of $5.09. It comes from nine forecasts ranging from 20 cents to 6-1/2 dollars.)
2020
- 2nd quarter 8 analyst estimate = $1.33, range = $(0.17) to $2.04
- 3rd quarter 6 analyst estimate = $1.33, range = $(0.33) to $1.77
- 4th quarter 3 analyst estimate = $1.08, range = $(0.09) to $2.09
- Year 9 analyst estimate = $5.09, range = $0.20 to $6.50
2021
- Year 9 analyst estimate = $8.64, range = $7.42 to $10.25
Put all these numbers together and we get a slew of valuations. With the stock priced at $92.66 (Thursday, July 2 close), here are the price/earnings ratios (P/E) and earnings yields (E/P) based on the various earnings estimates:
- 2019 EPS of $10.72 – 8.6x (11.6%)
- TTM (trailing 12 months) through 1st quarter 2020 EPS of $8.85 – 10.5x (9.6%)
- 2020 EPS estimate of $5.09 – 18.2x (5.5%) [Using the $0.20 – $6.50 range produces a P/E (E/P) range of 463x (0.2%) – 14.3x (7.0%)]
- 2021 EPS estimate of $8.64 – 10.7x (9.3%)
So, is JPMorgan Chase stock a good value or not?
At this point, it’s impossible to answer that question for JPMorgan and for most stocks based on highly uncertain earnings estimates. Yes, looking out to 2021 shows desirable annual estimates and reasonably normal-looking ranges. However, 2021 is too far from the sizeable unknowns we face currently. What evolves this year could significantly affect those 2021 estimates.
So, that brings us back to the nearby earnings season. Expect to see both weak earnings reports from many companies and positive achievements made over the past three months in terms of survival, operational and opportunistic strategies. Those achievements could be the source of positive “surprise” in this earnings season, regardless of the earnings. Moreover, they might allow us to separate good value from not so good.
The bottom line: Get ready for forward-looking reality in the coming earnings season
JPMorgan Chase leads off, and that is propitious. The largest U.S. bank is in the middle of the action, offering and managing services for a broad array of clients and customers. Its combined focus on competitive success and risk control rests on realistic strategies and expectations, not fads, favoritism or fluff.
Therefore, paraphrasing the old EF Hutton line, “When JPMorgan Chase (and Jamie Dimon) speaks,” we should listen.
Note: If you haven’t read the previous JPMorgan Chase earnings report transcript, now is a good time to do so. In it, Jamie Dimon stresses the many uncertainties that existed at that time (about three weeks into the U.S. shutdown and in the middle of the government’s stimulus planning). Those unknowns prevented the company from developing foresight (AKA guidance).
On pages 14-15, Jamie answers a question from the Morgan Stanley MS analyst as follows (underlining is mine):
“I’ll start by saying commercial real estate, eventually, it will be loan by loan and name by name too. So, if you have reason to believe that a loan is bad, you’re going to write it down and put a reserve against it, something like that. This is such a dramatic change of events. So, there are no models that have done – dealt with GDP down 40%, unemployment growing this rapidly. And that’s one part.
“There are also no models that have ever dealt with a government, which is doing a PPP program which might be $350 billion, it might be $550 billion. Unemployment, it looks like 30%, 40% of people going on unemployment book higher income than before they went on unemployment. So, what does that mean for credit cards and something like that? Or that the government is just going to make direct payments to people. So, this is all in the works right now.
“The company is in very good shape. We can serve our clients, and we’re going to give you more detail on this, but it’s happening as we speak. And I think people are making too much of a mistake trying to model it. When we get to the end of the second quarter, we’ll know exactly what happened in the second quarter. We know – you’ve got to respect the credit card delinquencies, and charges will go up though we’ve seen very little of it so far. But, in the second quarter, you’ll see more of it. And then we’ll also know if there’s a fourth round of government stimulus. We’ll know a whole bunch of stuff, and we’ll report that out. We’ll hope for the best, which is you have that recovery, and plan for the worst so you can handle it.”