This Stock Will 'Lend' Good Returns Ahead of Earnings

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Money center titan JPMorgan Chase (NYSE: JPM) once enjoyed a solid reputation – particularly for how it managed the credit crisis. Today, the bank is trying to repair a damaged reputation as part of the now infamous “London Whale” trade. However, since that embarrassing event, the stock has gained 40% after reaching a bottom at $30.83.

The market has essentially said “so what.” Although it did help that JPMorgan has reported solid earnings, including Q3, which reminded the Street of what a money machine the bank still is. Now, with the bank’s Q4 report due out Wednesday, investors are looking for confirmation that all should be forgiven.

Q3 Was Very Telling

Nothing says I’m sorry to investors better than beating earnings. And JPMorgan’s recent performances spoke very loudly. For instance, in its third quarter report, JPMorgan earned $1.40 per share on revenues of $25.9 billion – exceeding both top and bottom line estimates by 6% and 16%, respectively.

Revenue of $25.9 billion was not only 13% better sequentially, but it advanced 6% year-over-year. Likewise, net income was equally impressive, surging to $5.7 billion. This represented a 15% sequential improvement and topped last year’s mark by 34%. Also notable during the quarter was JPMorgan’s performance in its core banking segment as well as commercial lending.

Essentially, JPMorgan forced the market into forgiveness by exceeding expectations and differentiating itself from rivals such as Citigroup (NYSE: C) – although Citi beat top and bottom line estimates, its $19.4 billion in revenue declined year over year by 7%. By contrast, JPMorgan saw sequential growth in both checking accounts and average deposits.

Then again, in the “not-so-good” part of the report, JPMorgan experienced weakness in its retail channel, which shed 2%. Likewise, the bank is still struggling to keep loan balances up, as it appeared consumers have cut down on spending.

Nonetheless, management deserved credit for producing such solid numbers despite the bank’s slowdown in net interest income (NII), which fell 2% sequentially. Still, that it was able to generate EPS growth of 15% above the previous quarter despite a drop of 9 basis points (to 2.92%) in its net interest margin (NIM) was pretty telling.

Expectations for Q4

For the fourth quarter, analysts are expecting earnings to arrive at $1.20 per share on revenue of $24.46 billion, which would represent a 10% growth year-over-year. In recent weeks, analysts have been extremely positive about JPM’s prospects.

Recently, Goldman Sachs reiterated a buy rating on the stock while increasing the price target from $50 to $52. It’s worth noting however, that this followed Goldman Sachs opting to remove JPMorgan from its “conviction buy” list. Then again, what's more telling than raising a price target?

Analysts at Sterne Agee also upgraded JPMorgan to buy from neutral while raising its price target from $47 to $51. It is certainly an encouraging sign that prominent analysts continue to show such confidence. However, it's the bank’s recent execution that's been the cause for such bullishness.

Likewise, that Wells Fargo (NYSE: WFC) recently beat on both top and bottom line estimates is also a welcomed sign for JPMorgan. Wells Fargo posted a 24% jump in fourth-quarter profit – helped by better than expected performance in mortgage-banking income and credit. Profits totaled $5.09 billion, up from $4.11 billion year-over-year.

It remains to be seen how JPMorgan’s performance stacks up against Wells Fargo. But if the previous two quarters serves as indication, JPMorgan should have no problems meeting and exceeding expectations. This is what the market understands, which also supports the 40% increase in share price despite “London Whale.”

Bottom line

There is a lot to like with JPMorgan at current levels. Although the stock might trade at a slight premium when compared to other banks, its current valuation is attractive on the basis of share buybacks over the next several quarters and an improving balance sheet.

Twenty percent upside in the stock should not be out of the question. Despite a very tumultuous 2012, the bank is performing as well as can be expected. As a result, fair value could easily approach $52 to $55 sometime this year, which makes this stock an excellent buy. 

rsaintvilus has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo & Company. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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