JP Morgan Chase Is A Buy After Reporting Q3 Result
After reviewing the JPMorgan Chase (NYSE:JPM) calendar Q3 earnings report and looking at the chart I cannot believe this stock is still trading at such a low valuation.
Trading at only 17X this year’s consensus and 12X next it represents a deep-value and high-yield for dividend investors. The business has been impacted by the virus but all signs point to a solid recovery and at least stable revenue and earnings if not a return to growth. While the near-term may be impacted by volatility, the longer-term oultook is very bullish.
JP Morgan Moves Up On Mixed Report
JP Morgan’s results are better than expected but there are some weak spots to be sure. The bad news is that topline revenue came in at $29.15 billion and down sequentially and YOY. Topline revenue is down 11.6% from that last quarter and -3.0% on a YOY basis.
The good news is that consensus is closer to $28.20 billion or about 335 basis points lower and segment results point to sequential if not YOY improvement for most.
On a division-basis, the core consumer and community banking revenue rose 4.0% sequentially but fell -9.0% YOY. Corporate and Investment Bank Revenue, while down on a sequential basis, is up 21% YOY with notable strength in the trading segments.
Both fixed income and equity trading revenue is up 30.0% and well above the company’s previous guidance. Commercial Banking fell 4.0% sequentially and is flat YOY while Asset and Wealth Management is up 4% QoQ and 5% YOY.
While the revenue figures are encouraging, it was the bottom-line results that got the market excited. This quarter the company reported $2.92 in GAAP EPS, $0.73 better than consensus, due to a slow-down in the company’s credit-reserve build.
Analysts expected JPM to squirrel away at least another $1.5 billion but it chose a much smaller $611 million. This brings the company’s total credit-reserves to nearly $19.5 billion or up a total of $15.32 billion, nearly 400%, from last year. Jamie Dimon, Chairman and CEO said:
"We further strengthened our capital and liquidity position, increasing CET1 capital to $198 billion (13.0% CET1 ratio, up 60 basis points after paying the dividend) and liquidity sources to $1.3 trillion. Home Lending benefited from strong production margins, and combined debit and credit card spend showed positive year-over-year growth in September for the first time since the widespread shutdowns."
JP Morgan’s Dividend Is In Great Shape
The smaller-than-expected build in credit reserves is noteworthy for two reasons. The first is that it shows growing confidence in not only the economic recovery but in the business ability to withstand expected losses.
The second is that it, along with the other $15 odd billion the company has saved, sets the stock up for a nice dividend increase, assuming of course the funds aren’t needed in full to cover credit losses. Any funds not needed to protect against credit-losses will eventually move back into the free-cash column and then into investor’s accounts.
Regardless, the company is a known dividend-grower and well-positioned to continue its streak of distribution increases. JPM wasn’t able to increase as scheduled this year because of the Federal Reserve and its stress-check/COVID-related caution but there will be another and probably very soon.
The company has indicated, if obliquely, that stock buybacks could resume as early as late-4th quarter 2020 which to means there is cash available not only for the dividend but for an increase as well. Until then, the 3.5% yield looks safe enough for me.
The Technical Outlook: JP Morgan Is Ready To Set New Highs
Shares of JPM stock have been wallowing near the post-COVID lows since March but look like they might be ready to move higher now. The Q3 results have shares up about 1.10% in early trading and already at a one-month high.
The indicators are both bullish so further upside should be expected but there are risks. The most obvious one is the potential for resistance at the top of the trading range. Resistance may be strong at the $105 to $106 range, and then again at $115. Longer-term, I see this stock moving up to regain its pre-COVID highs within the next four quarters.
