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Over the time, investment banks have turned out to be entities with moderate risk and return for investors. This article is an attempt to compare two investment banks which have been in headlines for past few months. By comparing the strategic, operational and financial performance of both the banks, we will aim at suggesting and providing insights for potential investors.

JPMorgan Chase & Co. (JPM)

JPM has been providing financial services in over 100 countries for more than 200 years. The core principle of the company is "taking care of the investor's interests." From an operational perspective:

  1. While experts are skeptical about the expense control measures adopted by the management of most of the investment banks, JPM's management seems to have improved its control over operations. Although JPM has reported a revenue decline by 13% in Q3 2012, tight expense control measures have saved net profitability from the bad effects of that revenue decline. A reduction in expenses by 36% has increased net margin and EPS by 37%. This is one reason why its quarterly dividend has increased by 55% over this year as shown in the following graphs.


(Click to enlarge)

Source: Y charts


(Click to enlarge)

Source: Y charts

  1. The bank seems to be inclined towards reducing interest expenses as well as risk of its portfolios. We feel so as JPM has increased investment in federal funds by 13% in Q3 2012 compared to Q3 2011.

If analyzed from a relative perspective, the forward P/E of 8.5x is considerably lower if compared to the industry. Other important multiples like P/S (1.9x) and PEG ratio (1.18) suggest that stock of JPM is undervalued. Based on forward EPS of $5.3 and historical P/E of 8.5x, we set a target price of $45 for JPM. With an expected future dividend yield of 0.028, the total gains for investors in the near future seem around 5% which are significantly higher than offerings of other competitors.

Target Price

$45

Expected Capital Gains

3%

Expected Total Gain

5%

Goldman Sachs Group (GS)

GS, the global investment banking titan has been providing financial services mostly to corporate customers for more than 40 years. If analyzed from an operational perspective, GS has shown a significant improvement in its performance as revenue has started moving up after the sheer decline of previous quarters. The downturn in previous quarters can mainly be attributed to the large sum of money which GS had to file with SEC for unlawful operations. The net income went down fivefold in the previous quarter but now it has started improving as shown in the following graph.


(Click to enlarge)

Source: Y Charts

If analyzed from a relative perspective, the P/E ratio for GS is 10.14x which is significantly higher compared to JPM. Other measures like PEG ratio (0.32) and P/S (2.01x) also suggest that GS is overvalued if compared to other rivals. Based on its forward EPS of $12.68 and historical P/E of 10.14x, we set a target price of $129 for GS. With an expected dividend gain of 0.02, we forecast a net gain of 3% for investors of GS in the near future which is lower if compared to industry average of 5%.

Target Price

$129

Expected Capital Gains

1%

Expected Total Gain

2%

Although Wall Street seems bullish about GS, the growing reputational risks about the company make us skeptical about future growth in its EPS. Because of the target price we have set, little room for capital improvement seems present for GS and therefore, we suggest staying away from the stock.

Our Stance

After drawing a holistic comparison between JPM and GS, we have come to the conclusion that:

  1. If compared to Q32011, the financial performance of GS has been more unsatisfactory than that of JPM.
  2. While JPM has not really seen significant reputational risks, GS has been facing such risks because of frequent hearings with SEC due to fraudulent behavior. This is the key reason why we are not bullish about GS. It seems quite evident from our analysis that the investment banking industry is quite competitive with operational effectiveness and reputation as key stock drivers. As GS is facing lawsuits and other such reputational risks, we feel that its status compared to JPM is a bit shaky.
  3. As it is a company with fair operational performance and low market risks, we have a buy rating for JPM. As far as GS is concerned, while its stock price is seeing a short-term rise, we feel that the prolonged reputational risks associated with weakness in operations are not encouraging enough to take a long position. We have a neutral rating for GS.
Source: Morgan Seems More Golden Than Goldman