Earnings: JPMorgan (JPM) and Marriott (MAR)

2 more names of interest today from 2 distinct sectors: JPMorgan (JPM) which is now the dominant franchise in pure banking with huge market share in mortgages (with refinancing Americans galore as the Fed manipulates rates), with extended arms into investment banking ... i.e. what Citigroup (C) was trying to pull off; and Marriott (MAR) which runs hotel space that tends to the upper end of the scale. (Marriott, Ritz-Carlton, Residence Inns) Again we are using these company reports not so much for the company specific analysis but to understand what is happening out there outside government transfer payments and inflated government economic data.

With JPMorgan or any large bank, as I foretold in this piece [Apr 20, 2009: BB&T - A Better Gauge on How Banks Will Try to "Outearn" their Losses]

So as we've laid out, the yield curve is so in banks' favor most of your nephews and nieces, at least those who have begun to crawl, will be able to run these banks at a profit. And as long as you ignore all the current loans on the balance sheet (and their burgeoning losses) we're all winners here. As the data below shows, it's just going to be a matter of "out earning" the losses - having the Fed and Treasury create incredibly favorable conditions for banks with hopes that gains from such a low borrowing cost, along with the refinance boom create earnings to fill the gaping holes by a deteriorating consumer.

Remember the bank model at this point: The government won't allow you to fail if you are big; the Fed is doing everything in its power to make your profitable, tax laws have been changed so you can mark profits up, and the accounting board (FASB) has relented to political pressure so you can mark assets on your book above "fair value". Basically every branch of government is working to make the financial oligarchs happy. So the goal is with all these benefits to out earn your old loan losses, whether they are via credit cards, mortgages, commercial real estate or just plain old vanilla loans. But you don't have to outearn the true losses, only the losses after the accounting changes introduced this year. They are also instituting a mountain of new fees to "thank" the taxpayer for his service in his acting like Atlas and putting the entire US financial system on their backs. [May 29, 2009: USA Today - Banks Find Ways to Boost Fees] And yes, you are welcome.

As for the hotel space, this is yet another area along with railroads, retail, restaurants, Harleys, Las Vegas casinos - that I use as a mosaic to tell me what the heck is really going out on there in America; especially the consumer who is 70% of the economy. We did a very in depth look at various players along the economic food chain from low end to high end in the hotel space in early May [May 1: A Stroll through the Hotel Space] and once again this is a group the fund managers run into because "that is what the playbook says to do" as we see green shoots 3-6 months ahead. As I keep repeating this has been a failed strategy other than for short term trading gains when everyone rushes into these groups on nothing more than hope - only to see it blow up on them when actual results come out. This is not your typical recession and the US consumer is not snapping back - but the same stocks are rushed into assuming it's your old school type of recession. Eventually these folks are going to get it "right" because even blind squirrels and stopped clocks eventually "nail it". But have they cost shareholders a ton of dough being oh so wrong in their various tries the past 18 months.

We've looked at Marriott (MAR) closely in the past; in fact a year ago [Jul 11, 2008: Marriott Earnings - Strong Overseas, Weak US - No Rebound until 2009] Do you see the sausage these CEOs sell? Well times stink now, but just wait until next (quarter / half / year) and that's when the rebound begins. So now we are a year later, and Marriott is still fail whaling it in. So much for the 2009 rebound. Let me guess, the CEO says he sees stabilization and the rebound will be 2010. Again, if you keep guessing and tossing out statements that no one calls you out on, you can say whatever you want. Works on financial entertainment TeeVee and works in corporate executive land. You know what the pundits were talking about at this time in 2008? 2nd half recovery... in contrast here was what I was saying:

Well the Kool Aid has worn off and "cautiously optimistic" has turned to "umm, not so much". Yet another company succumbs to the fairy tale of the "2nd half recovery" - the stock dropped 7% as unicorns, mermaids, and Hank Paulson were told "No Vacancy for You". Keep in mind Marriot is not exactly the Holiday Inn - they reflect what should be a more "sheltered" consumer from the storms hitting the lower and middle class.

Oh well, the 2nd half 2009 recovery it is! And if not then, the 1st half 2010 recovery it is! One of these halfs the recovery will arrive and then we can hear "I told you so!" Marriott had to guide down AGAIN ... and then in 90 days when they beat we can all sit and clap, forgetting the guide down and cheering "2nd derivative improvements". It's all just a parlor game in the casino of Wall Street. REVPAR (Revenue per room) plummeted by a quarter - I expect the same damage to happen when the Las Vegas casinos report. Hotel operators are discounting HEAVILY to get any traffic to come from the very hurt US consumer.

Due to the avalanche of earnings today and some days next week, we'll have some assistance from one of our readers in breaking down the earnings more in depth so I can go try to find some green shoots. From here Michael will carry the analysis looking at the nuts & bolts; thankfully he is a little more stately and formal in his prose than I am.

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My name is Michael Brisky, and I'm one of Mark's loyal readers/followers. You can find my blog here. Also, you can follow my posts and trades real time via Twitter at www.twitter.com/briskycapital.


JPM

JP Morgan Chase reported this morning, and expectations were actually (as opposed to most companies right now) fairly high. This is mostly due to increased revenue from investment banking (see Goldman Sachs). Here are some highlight's from JP Morgan's quarter (via Yahoo Finance):

• JPMorgan Chase & Co. posted a second quarter profit .... that easily surpassed expectations as strength in its core consumer and investment banking businesses offset a jump in credit losses.
• JPMorgan, the second big financial institution in a week to release upbeat earnings news, reported net income of $2.72 billion, or 28 cents per share, up 36 percent from $2 billion, or 53 cents per share, a year earlier. Revenue rose 39 percent to $25.62 billion from $18.4 billion. Earnings per share fell despite an increase in profit because the company had more stock outstanding in the most recent quarter ending June 30.
• Analysts forecast earnings of 4 cents per share on revenue of $25.89 billion for the quarter.
• The profit came despite a $1.1 billion charge, or 27 cents a share, as JPMorgan repaid in full $25 billion in loans it received from the government as part of the Troubled Asset Relief Program, or TARP. The bank was also hit by a 10-cents-a-share FDIC special assessment penalty.
• Results were driven by record investment banking fees and revenue in fixed income markets, much like rival Goldman Sachs Group Inc., which reported strong earnings on Tuesday. At JPMorgan's investment bank, revenue jumped 33 percent to $7.3 billion. The segment's profit more than tripled to $1.5 billion.
• But that was offset by credit costs that remain high in consumer lending and card services. The bank said it set aside $9.7 billion for credit losses, up from $4.29 billion a year earlier but down from the first quarter's $10 billion.

So as expected, key boosters to earnings were investment banking (1.5 billion in profit) as we saw a massive wave of stock offerings this quarter. The key detractors were like many large banks 1) repaying TARP funds, and 2) continued credit losses. As always, the street will hang on every word from CEO Jamie Dimon, and here is what he said this morning:

• CEO Jamie Dimon said he was "pleased" by the results, even as the company's latest numbers were weighed down by higher credit costs, particularly in the company's consumer lending and credit card businesses.
• Dimon said the company expects credit costs to "remain elevated for the foreseeable future." Still, the company has continued to lend,Dimon said.
• "Throughout this crisis, we have remained committed to doing our part to help bring stability to the communities in which we operate and to the financial system overall," Dimon said.

Overall, this was a pretty good quarter for Dimon and JP Morgan Chase. They took advantage of opportunities in the market and the results speak for themselves. But I'm not sure the street will be that happy as Goldman Sachs set the bar pretty high and these results could already be priced into their stock. Going forward, the question will be can investment banking income continue to be enough to offset the major difficulties in the credit-related businesses?


MAR

Next, let's look at Marriott. Completely different business, and one that is operating in a very difficult industry right now. They are getting hit on both sides as the consumer traveler is a weak market, as is the business traveler. Let's take a look at their quarter (again via Yahoo):

• Marriott International said Thursday lower revenue and hefty restructuring charges pushed down its net income 76 percent in the second quarter.
• The hotel operator also gave an outlook for the third quarter and full year that fell far short of Wall Street's expectations. Marriott and others in the industry have suffered in the recession as both business and leisure travel wane.
• Net income in the quarter ended June 19 plummeted to $37 million, or 10 cents per share, from $157 million, or 42 cents per share, a year earlier. Excluding restructuring and other charges, profit was 23 cents per share, 2 cents better than the average analyst forecast, according to Thomson Reuters.
• Revenue slid 20 percent to $2.56 billion from $3.19 billion, topping Street estimates of $2.52 billion. Meanwhile, revenue per available room at company-owned properties worldwide declined 26.1 percent. RevPar is a key metric for lodging companies.
• Marriott, which owns more than 3,200 lodging properties globally, said timeshare contract sales, while down from the 2008 quarter, rose sequentially. It expects the timeshare segment to generate positive cash flow this year.
• The Bethesda, Md., company expects third-quarter income in a range of 9 cents to 14 cents per share, well short of the current analyst estimate of 20 cents per share.
  
• It also predicts full-year earnings of 76 cents to 86 cents a share, below Wall Street's average forecast of 91 cents a share.
• Outside of North America, the company said it was hurt by a "difficult economic climate," along with concerns about the H1N1 flu virus. International comparable RevPAR slumped 31.5%, or 22.1% excluding currency fluctuations. In North America comparable RevPAR was off 23.4%, with the average daily rate down almost 15% at its luxury hotels.

Via CBSMarketwatch

• For Robert LaFleur at Susquehanna, the second quarter "results clearly show the struggles facing the lodging industry in the current economic environment. Moreover, its outlook emphasizes the ongoing challenges of limited visibility and residual weakness in the economy."

They are in a very difficult market. The two keys here are 1) RevPar declining 26.1 percent, and 2) the lowered forecast. They were still profitable and they said the timeshare segment was a bright spot, but this isn't enough to please Wall Street. They were weak on the two largest metrics here.


The takeaway from these two reports is that the consumer is still very weak. I expect this to continue as long as employment numbers are weak. The big banks can always find ways to make money, and the smart ones are doing well due to their diversified group of businesses. But, it might be difficult for banks to sustain these types of revenues. Also, companies that are heavily reliant on the consumer are still in a very difficult market.

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