Can The Coronavirus Crisis Reduce JPMorgan Stock To $60?

Despite almost a 35% decline in JPMorgan’s stock since the beginning of this year, at the current price of $89 per share, we believe JPMorgan has a significant downside. Why is that? Well, JPMorgan’s (NYSE:JPM) revenues would face a significant challenge due to lower commercial and consumer spending, not to mention the higher risk of loan defaults, resulting in lower earnings for the year. Our dashboard How Low Can JPMorgan Stock Go provides the key numbers behind our thinking for the drop, and we explain more below.

The point is, a significant contributor to this stock growth from the last two years was JPMorgan’s strong earnings per share. In contrast, JPMorgan’s P/E ratio, on a trailing basis, fell from about 15.7x at the end of 2017 to around 12.8x at the end of 2019. The P/E multiple is down to about 8.3x now, which is roughly 35% lower than the P/E figure at the end of 2019. And a sharper-than-expected reduction in earnings could take the multiple lower – making $60 a real possibility for JPMorgan’s stock under our downside scenario.

So what’s the likely trigger and timing to this downside?

With a shift in focus from long-term to near-term survivability, businesses are experiencing a drop in consumer demand as people are refraining from discretionary expenditures. The economic downturn could cause significant losses for businesses and individuals alike, impacting their loan repayment capability. This could result in sizable losses for JPMorgan, as it has a substantial loan portfolio of around $464 billion in consumer loans and $208 billion in commercial loans (based on reported numbers for year-end 2019). Further, as the economic condition deteriorates, it would become expensive for the bank to attract funding, negatively impacting all its operations. Similarly, the lower market activity would mean a drop in investment banking as well as capital raising deals – resulting in a decline in advisory & underwriting fees.

However, the bank could profit due to its significant presence in the sales & trading business. The company generated around 19% of its revenues from its sales & trading business in 2019. Given the extreme level of volatility in equity & debt markets over recent weeks, JPMorgan is well-positioned to report strong results for its securities trading arm, which should partially mitigate the negative impact of weak economic conditions on its other operating segments.

While recently released Q1 results saw a slight decline in revenues, we believe that Q2 results in July will further confirm the hit. We believe the full-year revenue expectations formed by the market at the time of July’s Q2 results may be closer to $98.3 billion – slightly lower than its 2017 revenue of $99.6 billion and a good 15% below the 2019 revenue figure of $115.6 billion (a separate dashboard captures key components of JPMorgan’s revenues under the base case scenario).

This could potentially trigger a sell-off, and JPMorgan’s P/E is likely to shrink further from the current 8.3x to 8.0x, which is about 38% lower than the 2019 P/E of 12.8x and the lowest level in the last four years. Further, margins are expected to drop by 20%, which would mean a 31% drop in earnings, translating into JPMorgan’s price drop of over 33%, to about $60 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020. As the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of JPMorgan’s multinational peers, including Morgan Stanley and Citigroup. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe JPMorgan’s stock price at levels of $105 (Trefis price estimate) and below provide a buying opportunity for investors willing to be patient.

See all Trefis Price Estimates and Download Trefis Data here

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