By Matt Doiron
JPMorgan Chase (JPM), like many other investment banks, has had a tough few years. The financial crisis wiped out a substantial portion of its market cap, the investment banking business has been in decline during the recovery, and the London Whale losses further damaged investor sentiment and generated concerns that the bank does not have proper risk-management procedures in place. Less than three months ago, CEO Jamie Dimon committed to his belief that JPMorgan Chase was turning around by investing millions of his own money in the company's stock in July.
Now the bank appears to at least be on the path back up. On Oct. 12, it announced earnings for the third quarter of 2012 that beat expectations and were up 33% from the third quarter of 2011. Revenue was up as well. This reverses the trend from the second quarter of the year, when both revenue and earnings were down from Q2 2011. The reaction in the market so far been fairly weak, which is a bit surprising to us as we had believed that JPMorgan Chase was trading at a relatively low valuation due to concerns about its core business. It currently carries a forward P/E of 8, and those forward earnings estimates do not yet include any revisions that analysts might make after seeing the bank beat its Q3 expectations. It trades at a discount to the book value of its equity, with a P/B ratio of 0.9. It also pays a dividend yield of 2.9%.
JPMorgan Chase had made our list of the 10 most popular stocks among hedge funds for the second quarter (see the full rankings here), as the number of funds and other notable investors in our database of 13F filings reporting a position in the stock at the end of June exactly equaled the number that had owned the stock at the beginning of April. Some sold out of the stock, but others took their place. For example, billionaire Julian Robertson, the founder of Tiger Management, initiated a position in JPMorgan Chase during the second quarter.
Citigroup (C), Bank of America (BAC), Barclays (BCS), and Wells Fargo (WFC) are a good peer group to use for JPMorgan Chase. When we look at these four banks, we can essentially break them into two groups: Wells Fargo, which has been doing well recently and thus trades at a premium, and the others. Wells Fargo reported earnings on the same day JPMorgan did, announcing a 22% increase in earnings over a year earlier. It trades at 9 times forward earnings estimates and at a considerably higher price than book value -- its P/B is 1.4. We think that JPMorgan Chase is still a better value, and now its business appears to be improving as well.
The other three banks each trade at a substantial discount to book value: Bank of America and Barclays at 0.5 times book value, and Citi at a P/B of 0.6. Their dividend yields are smaller than JPMorgan Chase's, with Bank of America's and Citi's being very small and Barclays paying 1.8%. Their forward multiples, meanwhile, are over a substantial range. Bank of America is actually the most expensive of all of these banks on a forward basis with a P/E of 10, while Barclays and Citi trade at six and eight times consensus estimates for 2013, respectively. Barclays, though apparently the cheapest, saw the largest decline in its business last quarter compared to a year ago.
JPMorgan Chase is lower priced than Wells Fargo, even though its business has not only stabilized but is growing nicely. It does trade at a premium relative to some other large banks, but on a forward earnings basis the gap is not very large. Given its recent performance, it may be a better buy than Barclays, Citigroup, or Bank of America as well.
Disclosure: I am long C.