JPMorgan's Projections Underline Just How Cheap the Stock Is
Just how cheap are JPMorgan's shares?
A quick look at the 24 components of the KBW Bank Index (I:BKX) provides a pretty stark comparison.
JPMorgan's shares closed at $47.60 on Tuesday, trading for 8.2 times the consensus 2014 earnings estimate of $5.80 a share, among analysts polled by Thomson Reuters. Only two of the 24 components of the KBW Bank Index traded at lower multiples to the forward estimates, while nine of the names traded for more than 11 times forward earnings.
Bank of America (BAC) is among the big banks trading at a higher multiple than JPMorgan, with shares closing at $11.13 Tuesday, or 8.6 times the consensus 2014 EPS estimate of $1.29.
Bank of America is a recovery play. Eventually the company will finish working through its legacy mortgage mess, dramatically reducing expenses and unlocking capital, but it is unlikely to match JPMorgan's earnings performance over the next several years. Looking back, Bank of America's operating returns on average assets (ROA) have ranged from a negative 0.09% to a positive 0.26% over the past five years, according to Thomson Reuters Bank insight. Meanwhile, JPMorgan's ROA has risen steadily from 0.21% in 2007 to 0.94% in 2012.
Among the component stocks of the KBW Bank Index, only two other names trade at less than 8.5 times consensus earnings estimates. Citigroup(C) closed at $41.29 Tuesday, trading for 7.9 times the consensus 2014 EPS estimate of $5.20. Capital One (COF) closed at $51.47, trading for 7.6 times the consensus 2014 EPS estimate of $6.73.
Of course, one can easily argue that both Citi and Capital Ones are bargains, and the shares are being held back for different reasons. Citi is going through its own multiyear transition to right-size its balance sheet and rein-in expenses. Capital One had a disappointing fourth quarter , and its January credit card numbers showed a sharp decline in loan balances, which will be accelerated when the company completes the sale of its Best Buy (BBY) card portfolio to Citigroup.
JPMorgan earned $21.3 billion during 2012, or $5.20 a share, despite the $6.2 billion hedge trading losses that were trumpeted by the business media and a few politicians. The company's return on tangible common equity during 2012 was 15%, increasing from 11% the previous year.
The company on Tuesday said that its annual net income target "through the cycle" was $24 billion, or $6.28 a share, based on its year-end 2012 share count. JPMorgan's "normalized" earnings target is $27.5 billion, $7.20 a share.
JPMorgan Chase also expects to achieve full compliance with the Federal Reserve's proposed capital requirements, with a Basel III Tier 1 common equity ratio of 9.5% at the end of 2013, rising to roughly 11.5% by the end of 2014, not including share repurchases. Based on regulatory requirements, the company projects it will have $28 billion in excess capital at the end of 2014, again excluding share buybacks.
A Higher Multiple Ahead?
Oppenheimer analyst Chris Kotowski on Wednesday said in a report that there was a change in tone at Tuesday's Investor Day meetings from previous years. "There always seemed to be a cadre of attendees whose questions seemed to betray a view that surely the industry was just kicking the can down the road and was in reality surely on the precipice of calamity," he wrote. At this year's Investor Day, the negative tone "was replaced by ticky-tack fine grain detailed questions about cost saves, branch builds, corporate culture and the like," Kotowski wrote.