Despite the prospects of rising interest rates, shares of JPMorgan Chase (JPM) have gotten punished over the past seven months. The stock has fallen 29% year to date and 27% over the past year. And just the past thirty days, the share have given up almost 15%. But is now a good time to buy the stock?
This question will be answered when the company reports second quarter fiscal 2022 earnings results before the opening bell Thursday. While interest rates are on the rise, so is inflation, which has already caused a noticeable slowdown in several areas of the economy. Earlier this year, the yield curve inverted, which typically indicates a recession is on the horizon. However, these issues aren’t new. And JPMorgan Chase, the largest bank in the world by market cap, has shown it can navigate these tough headwinds to return value to shareholders.
Offering a nice mix of earnings growth, income and value, JPMorgan has enjoyed a well-deserved reputation as being the best-executing bank among its peer group. However, its business is intricately tied to the U.S. and to some extent, the global economy, given its status as the country’s largest bank. That said, while inflationary pressures on consumers presents a potential headwind, consumer balance sheets are currently strong and bookended by wage increases.
At the current valuation, JPMorgan stock is priced at a forward P/E ration of 9.5 which is below its five-year and ten-year average go 12.5 and 11.4, respectively. In other words, the market has become too bearish. The management team has a solid reputation for execution and capital deployment. Combined with its 2.50% dividend yield, which has grown at an average of almost 8% over the last five years, JPMorgan looks like a solid opportunity ahead of earnings.
For the three months that ended June, analysts expect the New York-based bank to earn $2.95 per share on revenue of $31.96 billion. This compares to the year-ago quarter when earnings came to $3.78 per share on revenue of $29.96 billion. For the full year, ending in December, earnings are projected to decline 25.8% year over year to $11.40 per share, while full-year revenue of $127.69 billion would rise 1.9% year over year.
The estimates might seem underwhelming given they represent year-over-year declines in quarterly (down 31%) and full-year earnings, while full-year revenue growth is expected to be flat. But it also reflects how disruptive the pandemic was to JPMorgan’s business. On the whole, however, JPMorgan’s banking business has shown modest improvements not only in margins but also in loan volumes which have offset weakness in areas like mortgage lending and rising expenses.
The bank also has a strong trading business, thanks to increase volatility in all asset classes. As a result, the bank will likely report higher volumes for the just-ended quarter. That was not the case in the first quarter, however, when it missed EPS estimates by 7 cents, reporting adjusted EPS of $2.63. The miss was largely driven by $902 million net credit reserve build that impacted EPS by 23 cents. Q1 revenue of $30.7 billion declined 5% year over year, but topped estimates by $170 million.
JPMorgan management has been investing in many areas to offset weakness in its recessions-sensitive businesses. The higher expenses has surprised analysts. But the management team has a solid reputation for capital deployment. On Thursday investors will want see continued improvements on these areas to assess the long-term value of JPMorgan stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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