J.P. Morgan Puts The Past Behind

1/27/2014


  Recent Price
$58
  Dividend
$1.52
  Yield
2.6%
  P/E Ratio
10
  Shares (millions)
3,797
  52-Week Price Range
$59.82 - $45.92

J.P. Morgan Chase's ($58; JPM) solid, if unexceptional, results for the December quarter gave further evidence of an incrementally improving economy. They also showed the growing pains that come with higher interest rates during a messy transitional period for the mortgage industry. However, the results do offer a glimmer of good things to come from the higher rates. J.P. Morgan's net interest margin — the spread between the interest paid on deposits and that collected on loans — posted its first sequential gain since the quarter ended December 2011.

The bank has also begun to move past its litany of legal troubles, agreeing to settlements amounting to roughly $20 billion over the past year. However, the company is not yet free of the legal thicket, with CEO Jamie Dimon warning that more probes could be under way.

A lot of pessimism already seems priced into the shares. At 10 times trailing earnings, the stock trades 49% below the median for S&P 1500 financial stocks and 33% below its five-year average. J.P. Morgan shares yield 2.6%, exceeding their five-year average of 2.1% and sector median of 2.2%.

J.P. Morgan Chase, scoring above 80 for both sector-specific ranks, is a Focus List Buy and a Long-Term Buy.

Business breakdown

A vast company with a lot of moving parts, J.P. Morgan can be difficult for investors to grasp. Its consumer and community banking unit (46% of 2013 revenue, 45% of net income) operates about 5,600 bank branches, and management seems comfortable staying at that level. J.P. Morgan continues to build its internet presence, with 33.7 million active online customers, up 8% in the past year, and 15.6 million active mobile customers, up 26%.

The steady climb in interest rates accelerated the erosion of mortgage fees, down 40% in 2013. The mortgage-production business posted a loss in the December quarter, as cost cuts failed to keep up with evaporating volume. But the pipeline for business loans remains stable, and demand for automobile loans has improved.

The corporate and investment banking (34%, 36%) unit faces a weak deal-making environment, while rising demand for equity underwriting is partly offsetting a softening market for debt issuance. Commercial banking (7%, 11%) is paced by steady growth in commercial real estate.

Asset-management (11%, 9%) generated the strongest profit growth last year, with net income advancing 19%. Assets under management swelled 12% to $1.6 trillion.

The bank has positioned its investment portfolio to catch a bounce in interest rates by eschewing long-term bonds in favor of short-term. That provides greater flexibility to reinvest maturing securities as interest rates march higher. Management says a two percentage point rise in short-term and long-term rates would boost annual pretax income by about $4 billion.

J.P. Morgan also seems confident it will keep releasing reserves for potential loan losses, augmenting earnings in the year ahead. The consensus projects 2014 earnings of $5.97 per share, up 34% on 1% higher revenue.

An annual report for JPMorgan Chase & Co. is available 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
Dec '13
1.40
vs.
1.35
-4%
58.55
-
50.25
10 - 8
Sep '13
1.42
vs.
1.40
-8%
56.93
-
50.06
10 - 8
Jun '13
1.60
vs.
1.21
10%
55.90
-
46.05
10 - 8
Mar '13
1.59
vs.
1.19
-1%
51.00
-
44.20
10 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
105.79
5.70
1.15
58.55
-
44.20
10 - 8
2012
107.08
5.20
0.80
46.49
-
30.83
9 - 6
2011
110.84
4.48
0.20
48.36
-
27.85
11 - 6
2010
115.48
3.96
0.53
48.20
-
35.16
12 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
83
32
93
67
89
42
59

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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