J.P Morgan Valuation PT: $145

Summary

• Strong Value-Company to add to your Portfolio.
• Positioning themselves for continued growth.
• PT $145 12/21.

Key Insights:

• Strong growth rates for 2021 Est. – Recovery from 2020
  • EPS FY 2021 Est. 21.64% growth
  • Net income 2021 Est 26.95%
• Strong asset quality from banking segment
• 90% of Banking branches re-opened Q3 2020
• Regulatory agencies have halted share buy backs through Q4 2020
• Relative Equity Valuation against itself is reasonable
  • Trading within historical averages on P/E, FY 1 P/E & P/BV metrics
• Growth
  • 5yr Dividend growth for JPM is 16.5% vs 15.7% Peers
  • JPM quarterly EPS has been consistently growing quarter over quarter since Q1 2020
• FCF
  • JPM has strong FCF/EV relative to its peers JPM 35.4% vs Peers (.6%)

With 3Q 2020 results from JPM they were able to beat the consensus EPS: Actual $2.92 vs Est. $2.16. They showed to have a lower than expected loss from credit costs and growth in profitability from trading. JPM will have to look to prepare their balance sheet for possibilities in more losses from their consumer banking division with the possibility of default on loans to increase in the short-term due to consumers impact from COVID. With JPM’s customer for their consumer exposure is relatively better position (higher average credit scores) than their peers they shall b

e able to limit defaults compared to peers.

JPM investment banking underwriting division should be able to increase profitability from increased in debt underwriting for corporate clients. With the increase in volatility JPM trading division shall be able to constantly grow revenues in this market.

JPM investment banking division leads the industry among its peers for profitability from their 3Q20YTD ROE. They have been top two amongst their peer group in ROE for 2018 & 2019.  If their investment banking division is able to maintain profitability and growth, this will sustainably help their overall profitability and growth.

JPM CIB counts for 32% of the company’s overall revenue while they make up 33% of the company’s overall profit. With the increase in growth in the CIB division this will increase the overall earnings incrementally more as compared to other business segments.

With growth in their trading division continually growing over the last 5 years and all-time trading highs for both their equity and fixed-income trading this will reflect upon JPM’s earnings.

JPM is the leader in its peer group for investing into new technology and systems. As this is an expense for the company this will yield future growth and increased efficiencies. JPM is also the leader for investing into technologies that will fuel to grow the Bank rather than maintain current practices. BAC is right behind JPM – due significantly to the exposure of BAC to commercial banking while GS is in the middle of the pack. Since JPM is the largest revenue generating bank out of its competitors the growth in future investments in technology will continue to grow.

JPM Revenue Breakdown:

REV. Breakdown	Weight
Banking	54.65%
Institutional Financial Services	32.27%
Asset Management	13.08%

JPM is a diversified Bank through having exposure to banking, institutional financial services, and asset management. JPM majority of revenue comes from banking (54.65%).

Banking Breakdown	Weight
Consumer & Business Banking	$26.50B
Card & Merchant Services	$24.21B
Home Lending	$3.70B
Middle Market Banking	$3.70B
Corporate Client Banking	$2.99B

JPM’s banking segment is split up between consumer & business banking at $26.50B, card & merchant Services $24.21B, home lending $3.70B, middle market banking $3.70B and corporate client banking $2.99B.

JPM has most of its business exposure domestically. As of 2019 77.9% of their revenue came domestically while the remainder came from international business. The largest segment coming from Europe/Middle East and Africa (13.8%), with Asia/Pacific (6.3%) and Latin America (2.1%). Their exposure internationally has stayed consistent over the last 5 years.

Equity Valuation:

With P/E metric valuation JPM is trading close to historical averages for 1yr, 2yr & 5yr, signaling the share price is relativity priced compared to historical average metrics. Compared to the peer group JPM historical trades at a premium compared to others such as Goldman Sachs, Bank of America and Citi.

Data by YCharts

JPM is currently trading within main deviations. During March through June 2020, JPM’s share price exceeded the standard deviation resistance. This comes from the assumption of a sharp drop in share price associated with a sharp drop in projected future earnings. Previous to the February through March drop, JPM was trading within historical valuations at all-time high share prices. We believe we will see this prevail as the impact from COVID prevails. 

Using the Dividend Growth Model, we were able to compute the theoretical price for JPM of $113.75 – which is (2.4%) less than is currently priced at as of Nov. 2020. JPM has had a constant dividend growth rate of roughly 16.5% over the last 5 yrs.

With the estimates for EPS in 2020E ($7.68), 2021E ($9.75) & 2022E ($11.25)we have used a mixed of base and bull given the current market trends. We decided to use these estimates due to the growth in profitability for other segments of business outside of banking.

Share Price Performance:

JP Morgan relative to its competitors – Goldman Sachs  & Bank of America has been able to outperform Goldman in the last 5yrs while staying correlated with Bank of America. Bank of America has more exposure to their banking division than JPM while Goldman has more exposure to investment banking division than JPM. JPM has the balance of both in their portfolio of business proving to be a more stable investment than other in the long-term due to its diversification of their business segments.

Data by YCharts

Investment Thesis on JPM:

JP Morgan is an industry leader among its peers as the sheer size of the bank is the largest in the United States. With exposure limited to less than a ¼ to international. JPM has been able to have stable growth over the last years with constant growing dividends. We believe that JPM will be able to consistently grow beyond analyst recommendations.

JP Morgan was hit hard by the COVID-19 pandemic due to their exposure to cynical industry that would be affected by the current market. We believe this would be a great opportunity to purchase JPM to recap their recovery growth and future performance.

JP Morgan is an industry leader being the largest bank by assets that has a forward-thinking business model to ensure their future success for shareholders. They have continued to improve profitability in volatile markets with their CIB division. JP Morgan is investing in their future relativity more than their peers.

A bullish price-target for JPM by December 2021 will be $145. We believe this is manageable with continued EPS growth with our prediction of FY21’ $10.25 FY22’ $11.00 at their historical P/E this will put the company within our PT. Dividend growth past 5yrs has been 15% with our DGM giving JPM currently an intrinsic value of $115 which reflects current market prices.