Analysts' Choice: Diversification Helps J.P. Morgan Grow

5/1/2017


  Recent Price
$88
  Dividend
$2.00
  Yield
2.3%
  P/E Ratio
14
  Shares (millions)
3,630
  52-Week Price Range
$93.98 - $57.05

J.P. Morgan Chase ($88; JPM) offers everything we want to see in a stock: accelerating operating momentum, robust share-price action, an attractive valuation, and high Quadrix scores.

J.P. Morgan grew earnings per share 22% and revenue 6% in the March quarter, topping analyst estimates for both metrics for the sixth straight quarter. For the 12 months ended March, the bank's profits climbed 10% on 8% higher revenue.

The stock has returned 29% over the past six months and trades within 6% of its record high, set in March. Yet at 14 times trailing earnings, J.P. Morgan shares trade 6% below the average diversified bank in the S&P 500 Index. The stock trades at 13 times estimated 2016 profits, a 4% discount to its industry average.

The bank boasts broad strength in Quadrix, scoring 65 or higher for all six categories, resulting in an Overall rank of 95. J.P. Morgan also looks attractive compared to financial stocks by scoring above 85 for both sector-specific ranks. Yielding 2.3%, J.P. Morgan is a Buy and a Long-Term Buy.

Big is beautiful

The Federal Reserve's two interest-rate hikes since December have proved a mixed blessing for banks. Rising interest rates often translate into higher bank profitability, assuming banks raise rates on loans at a faster pace than they do on deposits. J.P. Morgan's net interest margin, a measure of lending profitability, remains below levels enjoyed by the other S&P 500 diversified banks, though it has risen faster than any other peer over the past two years.

But higher interest rates can also weigh on loan demand, as many banks experienced last quarter. J.P. Morgan said its average core loans rose 9% last quarter, down from 12% growth in the December quarter and 17% growth in the same period last year. Its mortgage fees and loan-servicing revenue slumped 39% last quarter.

However, J.P. Morgan's broad business structure helped the bank cope with slowing loan growth. Trading revenue advanced 13%, as investors repositioned their portfolios to account for higher rates. Investment-banking revenue jumped 34%.

J.P. Morgan has gradually built up excess capital, prompting management to say in February that it could return to shareholders 80% to 120% of profits over the next couple years, up from 65% in 2016, and still meet capital mandates set by regulators. Additionally, conditions for the Federal Reserve's 2017 stress tests appear to be less stringent for big banks, which could boost capital returns this year. The Fed has also hinted that it could begin to loosen its soft cap on
dividend payout ratios, currently at 30%.

Conclusion

Analysts are becoming increasingly bullish on the bank's profit prospects. The consensus anticipates 7% higher per-share profits in the June quarter and 8% growth for the year — and estimates are rising. Looking further out, the bank seems poised to benefit if lawmakers follow through on promises to loosen financial regulations and lower corporate taxes.

An annual report for J.P. Morgan Chase & Co. is available at 270 Park Avenue, New York, NY 10017; 212-270-6000; www.jpmorgan.com.

J.P. MORGAN CHASE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '17
1.65
vs.
1.35
9%
93.98
-
83.03
15 - 13
Dec '16
1.71
vs.
1.43
7%
87.39
-
66.10
15 - 11
Sep '16
1.58
vs.
1.68
10%
67.90
-
58.76
11 - 10
Jun '16
1.55
vs.
1.54
5%
66.20
-
57.05
11 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
105.49
6.19
1.84
87.39
-
52.50
14 - 8
2015
100.49
6.00
1.68
70.61
-
50.07
12 - 8
2014
102.10
5.29
1.56
63.49
-
52.97
12 - 10
2013
105.79
4.35
1.36
58.55
-
44.20
13 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
83
80
65
91
96
65

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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