JPMorgan Chase & Co. (JPM – Free JPMorgan Stock Report) is one of the oldest and most well-known banking institutions in the United States. The global recognition of the company’s iconic status goes as far back as the legacy of its founder John Pierpont Morgan, whose J.P. Morgan & Co. was integral in the development and expansion of corporate finance in the U.S. Indeed, his company was famous for 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. In this installment of Using The Value Line Report, we will analyze the company from an equity investment perspective, highlighting some of its attractive prospects, as well as 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. 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 make up at least half of its income stream.
Now, a closer look at the Value Line report on JPMorgan Chase reveals several noteworthy metrics, including the Ranks box at the top left corner of the page. Although the stock is currently ranked 3 (Average) for Timeliness, there is some indication that it may pick up some momentum going forward, as the market has likely already discounted current operational challenges. Indeed, the Quarterly Earnings box in the lower left side of the page shows that analyst Theresa Brophy expects share-net comparisons to be flat in 2016. First-quarter GAAP profits came in at $1.35 a share (not reflected on the page dated February 12, 2016, which was published prior to March-period earnings release), a nickel shy of Ms. Brophy’s estimate. Still, the stock has edged higher in recent trading, as this showing was stronger than the much-less optimistic consensus of many on the Street. Although Ms. Brophy’s updated outlook for 2016 and new estimates for 2017 will be included in our next full-page report in May, there are indications that performance is likely to pick up and the aforementioned incremental stock price gains may well be materializing ahead of this operational improvement.
With this in mind, there are a few more factors that ought to pique investor interest. A look at the historical financial data in the Statistical Array and the more recent information 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 roughly in line with the company’s equity book value (based on the last trading day’s closing price of $61.69 and equity book value of $60.51 at 12/31/15). Moreover, the projected equity book value per share of $64.90 is above the current price, which suggests that the stock is trading at value levels, especially when one takes into account the current P/E multiple of about 10 times earnings, which is lower than historical averages and well below the market median.
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 boost its distributions beyond 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 light on some of the challenges the company faces, as well as an explanation of its future prospects. Ms. Brophy notes that, while the Bank is contending with pressure from softer consumer banking income and the likelihood of contracting mortgage revenues, she declares, “we look for higher interest rates, the company’s business simplification efforts, and its strong positions in consumer and investment banking to support much stronger earnings by late decade”. On the other hand, she also points out that “the stock’s total return potential to 2018-2020 is below average”. All told, this equity is a strong holding for any well-balanced portfolio.