Why JPMorgan Is An Attractive Investment

| About: JPMorgan Chase (JPM)
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By Renee O'Farrell

The numbers are in. JPMorgan Chase (JPM) announced strong first-quarter 2012 revenue, at $26.7 billion, handily beating estimates of $24.4 billion. The company also beat earnings per share estimates, coming in at $1.31 a share, versus estimates of $1.12 a share. But, I suppose it should not have come as a surprise. After all, JPMorgan was the first to announce that it had passed the Federal Reserve's stress test, allowing it to increase its dividends by 20% (from 25 cents to 30 cents) - and that was the second time the company had received such clearance in as many years.

Right now, JPMorgan is currently trading at $44 a share on a mean one-year target estimate of $52.47, making for an expected upside of over 19%. Add this to the company's now sizable dividend of 2.70% and investors buying in now are predicted to earn roughly 22% of their investments in the company. With all this expected growth, JPMorgan is still priced low, at just 7.94 times its forward earnings. However, analysts are expecting that, going forward, the company's earnings will fail to keep pace with the rest of its industry. They are predicting that JPMorgan's earnings will grow at a rate of 7.63% a year on average over the next five years, versus expectations of 9.26% for its industry and 10.60% for the market at large.

With numbers like this, JPMorgan is certainly a buy and may well be the best choice out of its peer group, looking at Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and Capital One (COF). Hedge fund Lansdowne Partners seems to agree. The fund had over 12.5% of its 13F portfolio invested in the company at the end of the fourth quarter 2011, a position valued at $801 million. Highfields Capital Management, Maverick Capital and Adage Capital Management are also fans of the company.

Capital One is probably the closest in terms of its potential to deliver shareholder value. The stock recently traded at just under $54 a share with a mean-one year target estimate of $62.39. This plus its 0.40% dividend yield means that investors buying in today are predicted to earn roughly 16% in upside on the investment over the next year. Capital One is priced marginally lower than JPMorgan, with a forward price-to-earnings ratio of 7.86. It also has a stronger earnings growth estimate at 8.67% a year on average for the next five years, but I don't think these differences are enough to propel it past JPMorgan, especially since JPMorgan's dividend is so much larger.

Wells Fargo offers a dividend nearly that of JPMorgan, at 2.60% yield, but it doesn't have the upside to match. Wells Fargo is trading at just over $33 a share on a mean one-year target estimate of $37.53, meaning that investors buying in right now would only be looking roughly 16% upside. Wells Fargo is priced higher than JPMorgan, at 9.05 times its future earnings, yet it did not report nearly the caliber of first quarter 2012 performance JPMorgan did. Wells Fargo reported revenues of $21.64 billion, versus estimates of $20.24B, and an EPS of 75 cents, versus estimates of 72 cents, falling fairly short of JPMorgan's performance.

JPMorgan's revenue came in at over 9% higher than analyst estimates and its earnings per share toppled analyst estimates by roughly 17%. Wells Fargo's revenue outpaced analyst predictions by less than 7%, and its earnings by just over 4%. The company does have higher predicted earnings than JPMorgan - analysts estimate Wells Fargo's earnings will increase at an average rate of 9.55% a year over the next five years - but I think JPMorgan is positioned much better overall.

Citigroup has a fair amount of upside. It is trading at $34 a share with a mean one-year target estimate of $43.45 a share, making for an upside of nearly 28%, but look at its dividend. Citigroup only offers a dividend of 4 cents a year and it failed the Fed's stress test - not exactly encouraging, even if there was an error in the Fed's calculation. That said, Citigroup is priced low at 7.17 times its forward earnings and it has strong earnings growth estimates. Analysts are predicting the company's earnings will increase by 9.58% per annum on average over the next five years. But, I can't get behind this stock right now.

I am however bullish on Bank of America. This company is trading at just under $9 a share and has a mean one-year target estimate of almost $10 a share, making for a predicted upside of over 11% over the next 12 months. Bank of America is unique because even though it passed the Fed's stress test it has opted to not raise its dividends right now, preferring instead to stay at the 4 cents a year rate. This may mean less upside for investors in the short term but I think this is a strategy that is going to allow Bank of America to come back even stronger than it was before the crisis hit. Sure, it has lost some of its reputation, but what bank didn't, really?

Plus, Bank of America is priced low at 8.31 times its forward earnings and analysts are encouraged. They are predicting the company's earnings will increase by an average rate of 15% a year over the next five years. For my part, I am all on board. I think Bank of America is a great investment but would-be shareholders should keep in mind that they will need to hold on to the stock for a little while to realize its full value potential.

Disclosure: I am long C.