JP Morgan Chase (JPM) recently announced that the Federal Reserve had granted it clearance to up its dividends by 20 percent to 30 cents a share and institute a stock buyback program worth $15 billion. Under the approved terms, the company will be allowed to repurchase up to $12 billion in stock during 2012, with the remaining $3 billion slated for the first quarter 2013. JP Morgan's share price rallied on the news, shooting up more than 7% by the end of trading - and we think it will continue to climb.
The company had a large gross profit margin of more than 79% after increasing from the same quarter last year. JP Morgan also has a high net profit margin of 15.30%, outpacing its peers, as well as superior net operating cash flow growth compared to other stocks in its industry. The company is fairly strong. It was able to boost its return on equity from 4.6% at the end of 2008 to finish 2011 at 9.5%. With all this growth, the company has been able to raise its dividends twice since the start of the financial crisis. Yet, for all these positives, JP Morgan is still priced at a discount compared to its peers. It has a forward price-to-earnings ratio of 7.49 times its future earnings versus its competitors' average forward price-to-earnings ratio of 9.97.
JP Morgan does have its weak points. Both its net sales and income have slumped while its revenues dropped over 17% compared to the same quarter last year. The company's earnings per share also fell off considerably, shrinking almost 20% compared to the same quarter last year, and its earnings growth isn't great. JP Morgan's earnings growth was much lower at 12.87 than its peers' average of 35.48. In spite of this, we think that the company's share price will continue to rise.
JP Morgan has strong capital levels. Given that most of that strength comes from its corporate banking and credit cards divisions, and the fact that the needs of the modern consumer (e.g. credit cards, credit building, corporate banking, business expansion and credit), we think that JP Morgan is going to go up from here.
Bolstered by its current enthusiasm in the market, we think that this is one company that could soar. Paul Ruddock and Steve Heinz's Lansdowne Partners seem to agree. The fund had $800.96 million in JP Morgan at the end of December after increasing its position in the company during the fourth quarter. Jonathon Jacobson's Highfields Capital Management and Lee Ainslie's Maverick Capital were also bullish about JP Morgan during the fourth quarter. The funds had positions worth $311.07 million and $278.45 million respectively at the end of December.
We recommend it as a buy but caution investors that because the stock is trading at momentum right now it is vital to make sure they buy in at the right price. JP Morgan's intrinsic value is around $44.64 right now. We recommend buying under that mark. While the company is currently priced in that realm, we don't think its price will remain so low for long, particularly since many of its competitors are not so favorably positioned.
Look at Citigroup (C). It failed the Fed's stress test by just 0.1%. It will be able to "re-test" soon, and we are sure it will make the mark then, but until that happens Citigroup is falling behind its competitors that did pass and are able to increase dividends and institute share buyback programs. Investors love those things (as do we) and they are going to tend toward investments that offer those benefits, meaning that Citigroup is on the sidelines this round.
Further, Citigroup's numbers are in and of themselves not that encouraging. The company's earnings per share dropped almost 23% compared to the same quarter last year while its net income plummeted about 27%. Its revenues didn't fare much better; they fell by roughly 7%. Citigroup did manage to increase its cash flow by over 20%, but compared to its industry's average of around 247% that volume is peanuts.
Citigroup has had some improvements in corporate lending, credit quality and capital levels. Plus, the company is priced low, trading at just 7.16 times its forward earnings - marginally undercutting JP Morgan. However, sometimes a stock is priced low because its outlook is bleak rather than any inefficiency in the market. For instance, in this case it is no wonder that Citigroup is priced so low relative to its earnings given that its earnings growth rate is so low (3.14 versus an industry average of 35.48). Even for those with an eye towards a long position, with numbers like these, there is a good chance that Citigroup will go lower in share price before it goes back up again. We recommend waiting.
Bank of America (BAC) is in an even weaker position right now. While it has been able to increase its earnings per share considerably, moving from negative 38 cents in 2010 to negative 2 cents in 2011, it is still running in the red. Then, there is the fact that the company's share price fell over 60% in 2011 - hardly encouraging given the relatively flat performance of the market at large. Further, the company has been able to grow its revenues but not its net income and its net profit margin is surprisingly low. We think that Bank of America just doesn't have the outlook right now to warrant investment when JP Morgan is so strong.
Disclosure: I am long C.