J.P. Morgan Chase: Best Of The Banks

8/23/2010


  Recent Price
$37
  Dividend
$0.20
  Yield

0.5%

  P/E Ratio
11
  Shares (millions)
4,006
  Long-Term Debt as % of Capital
NA
  52-Week Price Range
$48.20 - $35.16

At J.P. Morgan Chase ($37; JPM), costs related to the financial meltdown were steep. The bank slashed its once-rich dividend 87% and accepted a $25 billion federal loan to backstop its balance sheet. Shares lost more than half of their value between September 2008 and February 2009.

But J.P. Morgan kept an eye on the future by scooping up two distressed companies, Bear Stearns and Washington Mutual. If J.P. Morgan managed to survive the crisis, the first deal would boost its share of the global brokerage business, while the second would provide a massive boost to its retail-banking unit.

Two years later, J.P. Morgan has emerged from the downturn as one of the strongest U.S. banks. The company has repaid its federal loan and built a strong capital position. Per-share earnings and return on assets have risen in each of the last four quarters. J.P. Morgan is a Buy and a Long-Term Buy.

Business breakdown

J.P. Morgan’s expansive portfolio of financial services and operations in more than 50 countries positions it to catch the first gusts of a global recovery. Here is a brief rundown of its businesses:

Retail financial services (29% of revenue, 11% of net income for the six months ended June) provides banking services for consumers and small businesses.

Investment banking (27%, 47%) generated more fees than any rival in the first half of 2010.

Card services’ (16%, 0%) net income finally turned positive in the June quarter, while the provision for credit losses fell to $2.2 billion from $4.6 billion at this time last year.

Corporate and private equity (8%, 11%) invests in both equity and debt securities.

Asset management (8%, 10%) works with institutional investors and wealthy individuals.

Treasury and securities services (7%, 7%) provides investment and information services to businesses and institutional investors.

Commercial banking (5%, 13%) offers lending and investment-management services to municipalities and corporations.

Outlook

Loan losses inherited from WaMu are likely to remain high in coming quarters. More importantly, new regulations threaten to curb the industry’s income from proprietary trading and credit cards. J.P. Morgan anticipates that the federal government’s financial reforms will affect 15% to 20% of its derivatives business and shave $750 million from credit-card income. Fortunately, many of the new rules won’t take effect until 2013, leaving the company time to adjust its product offerings.

On the positive side, J.P Morgan has $36.7 billion in credit reserves, and the downtrend in delinquencies on consumer loans suggests company loss estimates could be too high. The investment-banking pipeline also appears strong.

The shares trade at 11 times trailing earnings, 47% below the five-year average P/E ratio and a 25% discount to the average diversified-financial-services stock in the S&P 1500 Index. 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

Jun '10 $1.09 vs. $0.28 - 5% $48.20 -

$36.51

19 - 14
Mar '10 0.74 vs. 0.40 + 4% 46.05 - 37.03 21 - 17
Dec '09 0.74 vs. -0.28 + 5% 47.47 - 40.04 40 - 33
Sep '09 0.80 vs.

-0.06

+ 31% 46.50 - 31.59 137 - 93
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $115.63 $2.24 $0.53 $47.47
-
$14.96 21 - 7
2008 $101.49 $0.84 $1.52 50.63
-
19.69 60 - 23
2007 $116.35 $4.38 $1.44 53.25
-
40.15 12 - 9
2006 $99.30 $3.82 $1.36 49.00
-
37.88 13 - 10
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
90 89 86 55 69 77 40

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


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