By Matt Doiron
Regardless of the London Whale losses, JPMorgan Chase & Co. (JPM) is up 31% in the last year, easily beating the return of the S&P 500. The bank reported its earnings on January 16th, have turned in $1.39 in earnings per share in the fourth quarter of 2012 (easily beating expectations of $1.16). In total, JPMorgan Chase earned over $21 billion for the year off of essentially $100 billion in revenues.
This made for about $5.20 per share in earnings, which means that at the current stock price of about $47- the stock rose slightly on the day- the new trailing earnings multiple is only 9. The market cap is also a slight discount to the book value of the bank's equity, at a P/B ratio of 0.9. The stock also trades at 9 times analyst estimates for 2013. So, going by valuation metrics, JPMorgan Chase appears to be trading at value levels. Considering that the company appears to be doing well, with earnings per share rising nicely and expectations being that net income will continue to increase, we think that it might make for a good buy.
JPMorgan Chase made our list of the ten most popular stocks among hedge funds for the third quarter of 2012 (see the full top ten list), with 83 funds and other notable investors in our database of 13F filings reporting a position. Billionaire Ken Fisher' Fisher Asset Management more than doubled its stake in the company during the quarter, closing September with over 13 million shares in its portfolio (check out Fisher's stock picks). AQR Capital Management, a large hedge fund managed by Cliff Asness, was also buying the stock and reported a position of 4.2 million shares (find Asness's favorite stocks).
We can compare JPMorgan Chase to other large banks, including Citigroup Inc. (C), Bank of America Corp (BAC), Wells Fargo & Company (WFC), and Barclays PLC (BCS). Of these banks, Wells Fargo is generally thought to be the most reliable investment. As a result it trades at a premium to book value with a P/B ratio of 1.3, though frankly the company does so well in terms of getting a return on its assets that we can't call it overvalued- when we look at earnings we see trailing and 2013 P/Es of 10 and 9, respectively. So Wells Fargo is arguably as cheap as JPMorgan Chase even though it is generally considered a more premium bank- though in book terms there is something of a discrepancy. It is worth a look as well.
Citi is generally considered a lower quality bank than JPMorgan Chase, and its financial performance in recent quarters has not been good. In addition, Citi cannot even boast a discount to JPMorgan Chase in terms of its earnings multiple: the P/E in reference to 2013 numbers is 9 here as well. It- as well as Bank of America, whose earnings multiple is even less attractive at 12- do carry even larger discounts to the book value of their equity but these two companies seem to be having the opposite problem as Wells Fargo. They haven't been able to earn enough returns from these assets to bring income in line with book value. Barclays offers a combination of a low P/B ratio and a low 2013 price-to-earnings multiple, but its revenue and net income were down sharply in its most recent quarterly report versus a year earlier and so it might best be avoided as well.
JPMorgan Chase and Wells Fargo look like quite competitive value investments. JPMorgan Chase's recent quarterly report beat sell-side expectations and placed the trailing earnings multiple in single digits, which we think is an attractive price particularly when we also consider the discount to book value. The primary issue is that Wells Fargo- which does trade at a premium to book value, but is right in line with JPMorgan Chase if we value it based on earnings- may be an even better buy.
Disclosure: I am long C.