JPMorgan Will Be Solid 2014 Story

Feb.13.14 | About: JPMorgan Chase (JPM)

"Patience is waiting. Not passively waiting. That is laziness. But to keep going when the going is hard and slow - that is patience." - Anonymous

Executive Summary:

  • Although in regulators' crosshairs during much of 2013 and early in 2014, JP Morgan looks attractive here from a longer term perspective.
  • The "Too Big Too Fail" bank is picking up analyst upgrades.
  • Earnings are expected to accelerate sharply in FY2014.
  • The bank is cheap on an absolute basis and offering an attractive entry point prior to Analyst Day

JP Morgan (NYSE:JPM) has certainly been in the news recently, and not for the right reasons. The company has been hit with over $20B in fines & settlements over the past year. It has taken flak from the financial press and political leaders from everything from the "Whale Trade" to the recent salary increase given to its well-known CEO, Jamie Dimon.

For investors willing to look past the headlines, the stock is offering an attractive entry point before its upcoming Analyst Day. The bank is also starting to catch some analyst upgrades as its works through the regulatory & litigation mess mostly triggered by its acquisition of Bear Stearns & Washington Mutual during the financial crisis.

Valuation:

The stock is selling at just over 9x this year's expected earnings, a 40% discount to the overall market multiple (~15x). These earnings are projected to grow more than 35% over FY2013's levels according the current analyst consensus. Earnings will be driven by organic loan growth, continuing credit quality improvement and a reduction in litigation/regulatory expenses as we move through the year. Net interest margins should also improve over 2013 levels provided the economy continues to recover.

The bank still possesses a "fortress" balance sheet and also pays a 2.6% dividend yield with a high likelihood that will increase in FY2014 probably after 'stress tests' are completed in the first half of the year. Insiders have made some huge purchases recently in the stock and the median analyst price target by the 32 analysts that cover the stock is $65.50 a share.

Recent Analyst Upgrades:

Morgan Stanley came out today stating it was a good time to buy JP Morgan in front of its Analyst Day scheduled for February 25th. The stock has appreciated much less than in stock market in the last year than Bank of America (NYSE:BAC) or Wells Fargo (NYSE:WFC). In addition, on a FY2015 earnings basis than the other three biggest money center banks which also include Citigroup (NYSE:C).

This follows Societe Generale's upgrade earlier in the week. SocGen's analyst moved JP Morgan from a "Hold" rating to a "Buy" rating noting the bank's "acceleration in the resolution of mortgage litigation" as a factor behind the rating change.

Summary:

JP Morgan is working through its litigation & regulatory issues and should see sunnier days in 2014. It is cheap on a valuation basis compared to peers, has a solid balance sheet, pays a nice dividend and should see accelerating earnings growth during the current year. It is a solid pick up for patient long term value investors. ACCUMULATE

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JPM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.