JPMorgan Chase & Co. (JPM –Free JPMorgan Stock Report) is one of the oldest and most iconic banking institutions in the nation. The global recognition of the company’s elite brand stems from the famed lore and legacy of its founder John Pierpont Morgan, who’s J.P. Morgan & Co. was integral in the development and expansion of corporate finance in the United States, brokering some of the most pivotal mergers and consolidations of the late 19th and early 20th centuries, including those that formed what is now General Electric Co. (GE – Free GE Stock Report) and US Steel Corp. (X). Today, JPMorgan Chase (the Bank) is the largest of the “big four” multinational banks in the U.S. (by assets) and offers a wide array of retail banking, investment, and wealth management services. For the purposes of this review, we will take a look at the company from an equity investment perspective, highlighting some of its most notable investment merits, while also calling attention to its risk factors.
To begin, a brief synopsis on how America’s biggest bank actually makes money may well be in order. At the base level, the simple way to look at it is that the Bank takes deposits from savers and offers them a low interest rate in return. The Bank then lends that money to borrowers at a higher interest rate and makes a profit on the yield spread or the difference in interest rates. That process, however, is just one part of the retail banking business. In fact, over the past couple of decades, the company’s service fees for everything from overdraft penalties to multimillion-dollar charges for financial advisory and wealth management services, have come to account for a much more considerable share of Morgan’s income. Furthermore, the investment banking arm of the business actually invests in the financial markets through its proprietary trading division, which was recently in the media spotlight owing to some considerable losses it incurred during the spring of 2012. Although it is difficult to gauge precisely how the company slices up the pie, it is widely estimated that, combined, the Bank’s fee-based operations and its trading activities made up more than half of its income stream last year.
Now, from an investor’s perspective, a closer look at the Value Line report on JPMorgan Chase reveals several noteworthy metrics that warrant some attention. Firstly, the Rankings box at the top left corner of the page indicates that JPM shares were awarded a Timeliness rank of 2 (Above Average) back in October 2012, which suggested that the equity was likely to outpace the broader market's averages over the next 6 to 12 months. Since then, the stock price has risen 17%, outperforming both the Dow Jones Industrial Average (of which JPM is a component) and the S&P 500 indices over that span. This favorable rank change was likely prompted by an improved earnings outlook at the time, following a blowout third-quarter result (ended September 30, 2012). Indeed, scanning down to the Quarterly Earnings Per Share box toward the lower left hand corner of the page, actual data shows that the second half of 2012 was stellar for JPMorgan Chase and accounted for the lion’s share of the full calendar-year advance that led the company to its most impressive share-net result on record. While its recent triumphs are undeniably commendable and have somewhat overshadowed last year’s trading debacle and the media frenzy that ensued, the big question for prospective investors looking for an entry point is undoubtedly, is this performance sustainable?
That query leads us to a few more of the aforementioned metrics that ought to pique investor interest. A look at the Historical Financial Data in the Statistical Array, when compared to the data in the Capital Structure box, shows that, based on the market capitalization figure (as of the last report dated 2/15/13), the stock is trading at a modest discount to the company’s equity book value (based on the recent price listed at the top of the page; 1.3x tangible book value). Moreover, the Price/Earnings Ratio is well below historical levels and the broader market’s average (about 15x). This suggests that JPM shares are trading at value levels. Taking these factors into consideration, it is no wonder that the equity is very popular with hedge fund managers and other institutional accounts. A glance at the Institutional Decisions box on the upper-left hand corner of the page, when compared to the common shares outstanding in the Statistical Array, demonstrates that institutional investors make up about two thirds of the company’s stock holders. In addition, the Top Label indicates the equity boasts a solid dividend yield for income seekers, as it has strived to return its distributions to pre-recessionary payout levels. This, coupled with its recently accelerated share repurchase program, demonstrates the Bank’s willingness to use excess cash to enhance shareholder value.
In conclusion, a look at the Analyst Commentary sheds some light on some of the challenges the company faces, as well as an explanation of its future prospects. Analyst Theresa Brophy notes that, while the Bank is contending with pressure from softer consumer banking income, the likelihood of contracting mortgage margins, and the probability of tougher fixed-income revenue comparisons in 2013, she declares, “The year ahead should be a good one for JPMorgan.” Moreover, although she highlights that the “stock may not be suitable for risk-averse investors, however, since investment banking revenues are subject to occasional wide swings and could be hurt by proposed proprietary trading rules.”, she also points out that “the shares still have decent total return potential” over the next 3 to 5 years.
At the time that this article was written, the author held no positions in any of the companies mentioned.