J.P. Morgan: Doors Shut, Doors Open

3/28/2011


  Recent Price
$45
  Dividend
$1.00
  Yield
2.2%
  P/E Ratio
11
  Shares (millions)
3,935
  52-Week Price Range
$48.36 - $35.16

The latest step in the banking industry's recovery arrived with a round of stress tests, after which federal regulators allowed some U.S. institutions to declare dividends of up to 30% of profits. J.P. Morgan Chase ($45; JPM) promptly raised its per-share quarterly dividend to $0.25, payable April 30, partially reversing the 2009 cut to $0.05 from $0.38. Management also approved the 2011 repurchase of up to $8 billion in stock, or more than 4% of outstanding shares.

Some residue from the recession still remains. J.P. Morgan is fighting a slew of lawsuits, most notably relating to mortgage loans and Bernie Madoff's Ponzi scheme. New legislation is sealing off traditional revenue streams. And though J.P. Morgan's return on equity has improved sequentially in six straight quarters, it still remains well below its prerecession peek.

Still, the financial giant's valuation and growth outlook are compelling. At 11 times trailing earnings, the stock trades 31% below its five-year average. At less than 10 times estimated year-ahead earnings, the shares carry a 36% discount to the average financial stock. The consensus calls for per-share profits to jump 21% to $4.79 in 2011, and expectations of 7.5% annualized growth over the next five years appear reasonable. J.P. Morgan Chase is a Focus List Buy and a Long-Term Buy.

New realities

Regulatory reform and higher capital requirements will likely constrain the investment-banking segment (38% of 2010 net income) from generating a higher return on equity. But management expects higher ROE for most of its other businesses, including retail financial services (14%), asset management (10%), card services (12%), and treasury and securities services (6%).

The retail unit seems sufficiently capitalized to survive stiff headwinds in the housing industry. Home-lending reserves can sustain eight quarters of J.P. Morgan's current forecast of $1.2 billion in losses per quarter. That estimate could prove high, considering improving charge-off trends.

Legislation to curb debit-card fees charged to retailers could take a $1.3 billion bite out of 2011 revenue. To offset that loss, J.P. Morgan will consider new fees from online and mobile banking, higher ATM charges, or the elimination of services such as rewards programs and free checking.

International markets represent a key area for growth. CEO Jamie Dimon sees banking growing up to three times faster in emerging markets than it will in the U.S. and Western Europe. In October, J.P. Morgan paid an estimated $270 million for a 55% stake in a Brazilian hedge fund with $6 billion under management. In January, Chinese regulators approved J.P. Morgan for a joint venture to underwrite stocks and bonds. China accounted for about 27% of the global volume for initial stock offerings in 2010.

Conclusion

Success abroad will be critical for J.P. Morgan to reach its 2013 net-income target of about $24 billion, implying per-share profits of $5.60 to $6.00, depending on stock buybacks, versus $3.96 earned last year. 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
Dec '10
1.12
vs.
0.74
+ 12%
43.12
-
36.21
12 - 10
Sep '10
1.01
vs.
0.80
- 11%
41.70
-
35.16
12 - 10
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
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
115.48
3.96
0.20
48.20
-
36.16
12 - 9
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
84
85
90
46
76
25
51

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


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