With Some Polish, J.P. Morgan Shines

11/26/2012


  Recent Price
$41
  Dividend
$1.20
  Yield
3.0%
  P/E Ratio
9
  Shares (millions)
3,814
  52-Week Price Range
$46.49 - $28.28

You need not work hard to find reasons to dislike J.P. Morgan Chase ($41; JPM): slow economic growth limiting revenue growth, low interest rates compressing profitability, and a steady stream of plaintiffs suing over soured mortgage loans. Exacerbating J.P. Morgan's woes, the re-election of President Obama dashed bankers' hopes for regulatory relief. 

But when a stock's price discounts its risks, investors should take a look. As a group, diversified financial-services companies average Quadrix Value scores of 84, and J.P. Morgan might be the best bargain of the bunch. The shares trade at eight times trailing earnings, versus a three-year average of 12 and the median of 15 for all financial stocks in the S&P 1500 Index.

If the stock's P/E ratio expands to 10 and J.P. Morgan matches the 2013 consensus profit estimate of $5.32 per share, the shares will rise 31% by the end of next year. Over the last 60 days, J.P. Morgan's 2013 profit consensus has risen 3.2%, well above the average of 1.7% for large and midsize banks in the S&P 1500. Analyst estimates imply 6% profit growth, but that target could prove conservative if economic conditions improve only moderately. J.P. Morgan Chase, yielding 3.0%, is a Long-Term Buy.

Turning the corner

J.P. Morgan's retail financial services (31% of 12-month sales, 28% of net income), commercial banking (7%, 12%), and treasury & securities services (8%, 7%) segments have delivered consistent growth so far this year. Retail financial services, the bank's largest unit, saw mortgage applications surge 26% to $73.2 billion in the September quarter. Last month, CEO Jamie Dimon said, “We believe the housing market has turned the corner.” As of September, J.P. Morgan had provided $6 billion in mortgage-loan relief in connection with a February settlement over foreclosures.

The mortgage business should help the retail unit keep delivering solid growth. And as long as credit trends keep improving, the company should be able to reduce reserves for potential loan losses, further boosting profits.

Even J.P. Morgan's investment bank (25%, 27%) seems relatively well positioned. Trading profits have declined at a slower rate than many peers, and the business showed signs of stabilizing in the September quarter. Hoping to boost growth, J.P. Morgan is investing in electronic trading and expanding in Asia and Latin America.

Signaling that it has moved past the “London Whale” trading fiasco, in which a rogue trader took positions in credit derivatives that generated $6.2 billion in losses, J.P. Morgan said earlier this month that it plans to repurchase up to $3 billion in shares by the end of March. Meanwhile, the bank's 25% payout ratio (dividends equating to 25% of earnings) suggests J.P. Morgan can afford to hike the quarterly payout from its current $0.30 per share. The stock yields 3.0% — among the biggest banks, only Wells Fargo ($32; WFC) yields more.

For the December quarter, Wall Street targets per-share profits of $1.23 per share, up 37% on 11% revenue growth. An annual report for JPMorgan Chase & Co. can be obtained at 270 Park Ave., New York, NY 10017; (212)-270-6000; www.jpmorganchase.com.

J.P. MORGAN CHASE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '12
1.40
vs.
1.02
+ 3%
42.09
-
33.10
10 - 8
Jun '12
1.21
vs.
1.27
- 18%
46.35
-
30.83
11 - 7
Mar '12
1.19
vs.
1.28
- 3%
46.49
-
34.01
10 - 8
Dec '11
0.90
vs.
1.12
- 18%
37.54
-
27.85
8 - 6
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
110.84
4.48
0.80
48.36
-
27.85
11 - 6
2010
115.48
3.96
0.20
48.20
-
35.16
12 - 9
2009
115.63
2.24
0.53
47.47
-
14.96
21 - 7
2008
101.49
0.81
1.52
50.63
-
19.69
63 - 24
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
75
92
49
94
89
80

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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