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The financials sector looks strong in my opinion given that our current economic recovery is strengthening the return-risk and growth characteristics of financial institutions across the United States. JPMorgan (NYSE:JPM) is one of many financial institutions that is extremely well-managed and well-diversified, but it stands out among the other banks. It is the largest bank by assets in the U.S, and I believe that it is an extremely good investment for the long-run investor. I will look at its growth prospects, profitability, valuation, and risks in this article.

Growth

JPM's annual revenue growth rate has been negative since FY2010. However, as JPM looks back at the 2008 financial crisis in its rearview mirror, analysts expect its net revenues to grow at a positive rate in 2013. Earnings per share have been increasing since 2008, are growing faster than revenues, and posted an impressive 16.07% growth in earnings in FY 2012. These numbers tell me that JPM is finding ways to minimize expenses, as earnings grow quickly relative to revenues.

Growth2013E201220112010
Net Revenue Growth, YoY2.45%-0.21%-5.32%2.25%
Earnings annual growth9.8%16.07%13.13%75.22%
Earnings per share (annual)$5.71$5.20$4.48$3.96

Expect JPM's revenues and earnings to continue to grow.

Profitability

JPM's margins have been increasing at a steady rate since FY 2010. Net profit margins have increased from 16.91% in FY 2010 to 21.94% in FY 2012. Analysts expect this number to increase to approximately 23.82% in FY 2013. Return on equity (ROE) and return on assets (ROA) have also increased steadily since 2010. JPM's ROE surpassed 10% in FY 2011, and its ROA is rising toward 1%. These numbers suggests that JPM is improving operations and allowing investors to earn more money on their investment, something that I look for in companies.

Profitability2013E201220112010
Net Profit Margin23.82%21.94%19.52%16.91%
ROE 10.72%10.21%9.69%
ROA .92%.87%.84%

Valuation

JPM is a very strong investment according to its valuation metrics. I compared it to Citigroup (NYSE:C), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and Goldman Sachs (NYSE:GS). I wanted to include the three other "Big 4" banks, all of which are very well-managed and well-diversified. I also wanted to focus on a firm more known for their investment banking and securities underwriting products (Goldman). Finally, I have provided the industry averages for comparison. The following table presents several valuation measures among all five banks. Take note of JPM's P/E ratio and ROE relative to the industry.

TickerMarket CapDiv. YieldP/EROELT EPS G and DY*
JPM$202B2.28%8.8311.32%13.71%
C$155B0.08%12.094.52%10.91%
BAC$142B0.31%14.971.64%12.60%
WFC$216B2.27%11.2913.45%11.66%
GS$76B1.22%10.3610.61%11.86%
Industry$92B2.24%14.968.6%12.16%

*Long-term EPS growth plus dividend yield

These numbers suggest that JPM is a very cheap stock. I would certainly buy it today. It produces a strong dividend yield and has a significantly lower P/E than the industry. However, it is still expected to grow in earnings and ROE, two important measures for investors to consider.

Year-to-date, JPM has posted an impressive 21.67% return, compared to the S&P 500 at 13.76% and the Financials Select SPDR ETF (NYSEARCA:XLF) at 19.76%.

Risks and Concerns

One of the main concerns that I noticed in JPM's financial statements is its recent poor performance internationally. Especially since firms like Citi and Wells Fargo have a major international presence, JPM may need to focus on where it can grow internationally. This will allow JPM to remain as one of the market leaders in the financial services industry. Below is a table showing its recent struggles internationally.

Concerns201220112010
Net Income
U.S$18, 274M$12,412M$11,791M
International$3,010M$6,564M$5,579M

While earnings in the U.S have risen steadily, international earnings took a major hit in 2012. This mostly has to do with the London Whale fiasco, where JPM lost $2 billion in risky credit default swaps. Risk managers must do a better job at preventing these extremely risky and unnecessary trades, but I expect JPM to learn from its mistakes going forward under CEO Jamie Dimon's tenure. I will be interested to see how JPM's international earnings compare relative to 2012.

Conclusions

Based on my analysis, JPM is a buy for the long-run and is considerably undervalued. Markets are extremely volatile in the short-run, but I expect JPM to outperform its competitors given its extremely cheap valuation, improving margins, improving earnings, and room for growth internationally. Finally, I want to stress the importance of the intangibles. JPM has two key advantages in the financial services industry: company management and brand name. These make JPM worth more than what the books might suggest. Therefore, I would consider JPM as a potential investment for anyone.

Source: JPMorgan Is A Buy