Thursday, July 14, 2011

Why JP Morgan Always Beats (JPM)

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JP Morgan (NYSE:JPM) turned in a very solid second quarter earnings report this morning. Revenue was $2 billion better than expected, at $27.4 billion. And earnings were $0.06 better than expected, at $1.27 a share. This was the 11th consecutive quarter that JP Morgan has beaten. 

You'd think analysts would be able to adjust their estimates to account for the consistent out-performance at JP Morgan. And truth be told, they probably are. But there are so many little things the company can do to get its quarterly numbers that analysts have little chance of nailing it. 

For one, there's JP Morgan's stock repurchase plan. It bought back $3.5 billion in stock last quarter. Stock buybacks lower the number of shares outstanding and hence therefore raise earnings per share (EPS). But since analysts have no way to be sure of the size of the buyback until the quarter is over, they must essentially guess at the number of shares outstanding. 

There are other variables, too, like loan loss reserves, litigation expenses (and there have been a lot of them), and even an obscure U.K. tax on bonuses paid to employees. Really, the analysts don't have a chance... 

J.P. Morgan can beat earnings at will. Much more significant is how the company does on revenues. Coming in $2 billion (10%) above estimates is very good, and can't be achieved by shuffling figures around. 

Last quarter, JP Morgan beat, but the weaker peers Bank of America (NYSE:BAC) and Citi (NYSE:C) turned in pretty poor reports. Don't be surprised if that happens again. 

The struggles facing the financials in the last quarter have been well-documented. There are ongoing mortgage litigation costs (including settlements), declines in trading revenues from falling commodity prices, falling interest rates that affect fixed income trading, exposure to European banks, weak loan growth and so on. 

JP Morgan has proven (again) that it is better equipped to handle adversity than most any other bank, and that probably now includes Goldman Sachs (NYSE:GS). 

Ratings agency Moody's has officially placed the U.S. credit rating on review. There have been warnings that the U.S. could suffer a downgrade, but it's the first time the rating has been under review since 1995. 

I expect you're well aware that the immediate catalyst for Moody's review is the imminent maxing out of the U.S. debt ceiling. Treasury Secretary Geithner has said that we essentially run out of money on August 2. 

It's appalling that Congress and the administration haven't passed a budget for this year yet. It's July, fer cryin out loud. I'm not naïve enough to think it should be easy, but it is needed, as Moody's actions prove. 

I am not taking sides as to which side has the correct idea in mind about dealing with our budget deficit and outstanding debt. But I will say that the American people are not being realistic. On the one hand, most polls show that Americans oppose any tax increase (unless it's on the wealthy). On the other, Americans also oppose any cuts to Medicare or social security. 

It should be obvious to anyone that we can't have it both ways. Future liabilities for Medicare and social security are unfunded, as in "there's no money for them." 

There are only a few options here. If you want to maintain spending, then you have to take in more money. Sure, some extra spending cash could be pulled from other areas, like defense, perhaps. But to spend more, you have to take in more. That means taxes. 

I want to be clear that I am not advocating higher taxes. It's just that Americans as a group seem to think you can get more out than you put in and it just doesn't work that way. There is no free lunch, someone has to foot the bill. It's past time for some realistic debate on this topic. 

Finally, Google (Nasdaq:GOOG) reports after the bell today. Good results will spark a strong rally for the Nasdaq. That may seem obvious, but because Google is so diversified, it is a true bell-weather.


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