JPMorgan Chase (JPM) has been center stage in the media lately, and a quite a bit of it has been positive. Recently, JPMorgan Chase added a large solar deal to its portfolio, partnered with "Top Chef Masters" to highlight its new Chase Sapphire Preferred card, and promoted a veteran banking professional to lead its fastest growing banking segment in the country. Chase appears to be firing on all cylinders, while trading at a fairly attractive valuation. By looking at fair market value based on discounted cash flows, we can see that Chase has potential for big gains through 2013 and 2014. We will show this potential in the form of best case and worst case scenarios.
How Scenarios are Calculated:
Growth value=E(0) x(1-xn)/(1-x), where x=(1+g)/(1+d), n is the number of years business will grow at the rate of g; d is the discount rate. E(0) is the earnings of the company in the current year.
Terminal value=E(0) xny(1-ym)/(1-y), where y=(1+t)/(1+d), where m is the years of terminal growth; t is the terminal growth rate.
Best Case Scenario
The best case scenario for Chase will be calculated using a growth rate of 7.1%. This value was chosen based on the past 10 year growth rate of Chase, as well as Zacks investment research. A terminal growth rate of 6% was used, based on the past 5 year growth rate of the company.
Using the industry standard discount rate of 12%, we can see that the fair market value for JPMorgan Chase stands at approximately $70.93 per share. This is a 26% increase from the current share price.
Using this information, we can see that JP Morgan Chase certainly has potential to outperform the market over the long run. Next, we will look at a worst case scenario for investors.
Worst Case Scenario
The ultimate worst case scenario for Chase would of course be bankruptcy. We will not model that scenario here. In terms of worst case scenario for the next few years, we will use a growth rate of 2%. This is considered a worst scenario because it is essential just the historical average inflation rate. Based on this figure, we can see that a worst case fair market value for Chase would be $48.32 per share. That is only a 9% decrease from current market share price.
Results from these 2 scenarios indicate that the potential upside for Chase is more than 25%. The down side risk based on JPMorgan Chase growing at the historical inflation rate is low, standing at only 9%. This information indicates that based on risk and discounted cash flow, Chase is a buy at current market prices. External factors like positive media publicity and expansion into new sectors only add to the value and future growth of this financial giant.