JPMorgan Likely To Surpass Q4 Revenue Expectations, But The Stock Looks Overvalued

JPMorgan (NYSE: JPM) is scheduled to report its fiscal Q4 2020 results on Friday, January 15. We expect JPMorgan to beat the consensus estimates for revenues, while earnings will likely come in marginally below expectations. The diversified banking giant’s top line benefited in the first three quarters of 2020 due to its strength in sales & trading and investment banking business, and we expect the same trend to drive Q4 2020 results. Our interactive  JPMorgan Earnings Preview dashboard has additional details about our forecast for the bank’s revenues and earnings for the quarter and full-year 2020. 

That said, we believe that JPMorgan stock is currently somewhat overvalued. Our forecast indicates that JPMorgan’s valuation is around $116 per share, which is 17% below the current market price of around $140. There are 3 key factors behind our belief:

• JPMorgan’s revenues in 2020 were driven primarily by its sales & trading and investment banking units, which benefited from the Covid-19 crisis. However, as the negative GDP scenario improves, we expect both these revenue streams to normalize.
• Additionally, core banking revenues and profits will continue to suffer due to the lower interest rate environment and higher provisions for credit losses.
• Also, JPMorgan’s significant share repurchase program has helped boost its earnings over recent years despite revenues remaining largely level. We expect the Fed to rein in share buybacks across U.S. banks as a part of its next round of bank stress tests. This will likely dent investor optimism, and lead the bank’s stock lower over the coming months.

OVERVIEW OF Q4 2020 EARNINGS EXPECTATIONS

(1) Revenues expected to be slightly ahead of consensus estimates

Trefis estimates JPMorgan’s fiscal Q4 2020 revenues to be around $23.91 billion, $1.35 billion above the $28.56 billion consensus estimate. The bank has seen positive revenue growth in 2020 – cumulative nine months revenues have increased by 4% y-o-y to $90.3 billion from $87.1 billion a year ago. The majority of its growth was driven by sales & trading and investment banking businesses. While the sales & trading segment benefited from higher trading volumes driven by economic uncertainty, investment banking saw a jump in underwriting deal volume. Although the bank’s core-banking revenues did suffer due to the lower interest rate scenario, the negative effect was more than offset by the growth in market revenues. We expect the same to reflect in the fourth-quarter results, leading the full-year 2020 revenues to $120.3 billion – up 4% y-o-y. Thereafter, the top-line is expected to decline to $114 billion in FY2021, due to a drop in sales & trading and investment banking revenues. Our dashboard on JPMorgan Revenues offers more details on the company’s segments.

2) EPS likely to marginally miss consensus estimates

JPMorgan Q4 2020 adjusted earnings per share (EPS) is expected to be $2.47 per Trefis analysis, almost 4% below the consensus estimate of $2.58. The bank has increased its provisions for credit losses in 2020 – from $4.2 billion at the end of September 2019 to $19.4 billion at the end of September 2020, to cater to the loan default risk. This has resulted in a drop in the earnings figure – cumulative nine months EPS has decreased by 38% y-o-y. We expect the EPS to decline to $7.72 for full-year 2020, compared to $10.72 in the year-ago period. Thereafter, as economic conditions improve, we expect the earnings to rebound and be around $9.07 in FY 2021.

(3) Stock price estimate 17% lower than the current market price

Going by our JPMorgan Valuation, with an EPS estimate of around $9.07 and a P/E multiple of just below 13x in fiscal 2021, this translates into a price of $116, which is 17% below the current market price of around $140.

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year

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