(JPM) (JP Morgan)
Overview of the Company - JP Morgan Chase is a universal bank. This means that it offers consumer services as well as wealth management, commercial banking and also operates as a corporate investment bank. JPM relies heavily on interest rates, net interest margin as well as loan growth. Their wealth management division relies on the strength of the equity and other markets. Their corporate investment bank relies on their fees which are tied to the number and size of the companies that they advise/fund and take public in a given quarter.
Fundamental Analysis - JPM has seen big growth in their investment banking division thanks to the popularity of SPACs and small business culture in America. These small businesses that need funding or want to take the next step and become public may choose JP Morgan to help them do so. JPM has seen record high quarters in terms of revenue and earnings from this division in the form of their fees. Asset management has been an area of strength for JP Morgan due to the strength of the markets, especially equity markets this year. However, while loan growth has been steady, net interest margin has been crushed due to low interest rates during this last year. Additionally, added liquidity in the economy has lowered their revenue off of existing loans as consumers are able to pay their loans on time, even if JPM witnessed record credit card spend from those consumers this last quarter.
How (JPM) Stacks Up to Competitors - I will be comparing JPM to another universal bank, Wells Fargo (WFC) and a pure investment bank/wealth manager in Morgan Stanley (MS). Out of the three, JPM has the highest profit margin and return on equity but all three banks in general have very good margins. All three companies have very strong balance sheets with lots of cash in relation to their debt. While MS and JPM both trade at about 2 times book, Wells Fargo trades right around their book value. However it is clear that Wells Fargo is not as prestigious as MS or JPM. WFC continues to struggle from recent scandals and turmoil within the company - it is clear that Wells Fargo is more of a recovery play as investors hope for rising interest rates and for WFC to once again become a premier bank like JPM or MS.
Bull Case - With earnings coming out yesterday, JPM made it clear that they would continue to be able to beat expectations regardless of interest rates and high consumer liquidity. JPM posted EPS for the quarter at around $3.74 vs. the $3.00 expected. As their wealth and investment management division continue to drive earnings growth, JPM will be poised for a great year as interest rates will increase. Rising costs and lowering liquidity for consumers will allow JPM to open more loans and collect more interest off those loans, further boosting EPS.
Bear Case - JPM has had great recent quarters. However, their growth will not be sustained. More speculation and regulation around SPAC’s is in order and will undoubtedly decrease earnings for their investment banking division. Investors should also not have to rely on yields to see returns as JPM is too correlated with the economy. If we were to see an economic downturn as the economy runs too hot and inflation rises, JPM would have the farthest way down to go as it trades very expensively. At more than 2 times book value, JPM has limited upside and large potential downside.
Valuation and My Price Target - EPS will certainly slow down in the coming quarters as certain divisions will consolidate after posting record years, however I do believe that yields are going higher and consumer demand will remain high as liquidity falls. This will mean more loans and more credit card interest needing to be paid. Their growth from the consumer division will offset some of the stagnation in other areas of the business and JPM will continue to see solid EPS growth. My estimate for the next year's EPS (including yesterday's numbers) is $16.30. I believe JP Morgan trades at a fair multiple as this will put their stock at around $175 a year from now. This indicates about 8.7% annualized return not including the ~2.4% dividend yield.
The Verdict - BUY HOLD SELL
JPM is a premier universal bank, but everyone knows that. With spectacular earnings reported yesterday, the stock is currently down 2.5%. This just speaks to what investors are expecting from this stock. Had interest rates gone up substantially this quarter, we could have seen blowout earnings and for the stock to rise after earnings. That is one of the pitfalls of this stock, people who invest in JPM are inadvertently correlating themselves to interest rates. That is just something that I personally like to avoid. Even though I believe interest rates are going higher and that will be beneficial for JPM, with only an 8.7% expected return, the dividend is not large enough to warrant a purchase of the stock. JPM is a great company, it is just unfortunate that everyone already knows that. JP Morgan is currently a HOLD.