At $151, JPMorgan Stock Is a Bit Dear

JPM: JP Morgan Chase logo
JP Morgan Chase

[Updated 03/23/2021] JPMorgan Update

After a 91% rally since the March 23 lows of last year, at the current price near $151 per share, we believe JPMorgan’s stock (NYSE: JPM) is trading above its near-term potential. JPMorgan, the largest bank in the U.S. in terms of total assets, has seen its stock increase from $79 to $151 off the March 2020 bottom compared to the S&P 500 which gained almost 75% – the stock is leading the broader market and is trading 10% above its pre-Covid-19 peak in February 2020. The bank has surpassed the consensus estimates of revenues and earnings in its fourth-quarter results mainly driven by strong growth in trading revenues. Further, it has reported an earnings beat in each of the last three quarters. Hence, the investor sentiment is positive about the stock.

JPMorgan reported total revenues of $29.2 billion in the fourth quarter – up 3% y-o-y. This could be attributed to a 17% y-o-y jump in the Corporate & Investment Banking segment driven by higher sales & trading and investment banking revenues. However, the above growth was partially offset by an 8% decline in the Consumer & Community Banking unit. Similarly, its full-year 2020 revenues of $119.5 billion were 4% higher than the 2019 figure, primarily due to higher Corporate & Investment Banking revenues throughout the year.

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Sales & Trading revenues have benefited from high trading activity in 2020. Further, the investment banking space did witness a jump in underwriting deal volume due to higher demand for debt issuance and IPO (Initial Public Offerings). The same was true for JPMorgan – its sales & trading revenues grew 39% y-o-y, followed by a 23% jump in investment banking. However, the bank’s net interest income declined 5% y-o-y, due to the lower interest rate environment. That said, the sales & trading and investment banking revenues are likely to normalize in the current year. Further, the lower interest rate environment is unlikely to see a recovery to the pre-Covid-19 levels anytime soon. Both these factors will likely hurt JPMorgan’s revenue prospects, restricting it to $117.2 billion in FY2021. Additionally, JPM’s P/E multiple changed from around 11x in 2018 to just above 14x in 2020. While the company’s P/E is around 17x now, this leaves some scope for downside when the current P/E is compared to levels seen in the past years – P/E multiple of just above 14x at the end of 2020 and about 13x in 2019. Our dashboard “What Factors Drove 55% Change In JPMorgan Stock Between 2018-End And Now?” provides the key numbers behind our thinking.

[Updated 11/10/2020] While JPMorgan Stock Is Lagging The S&P, It Still Has Strength

Despite a 48% rise since the March 23 lows of this year, at the current price of around $117 per share we believe JPMorgan stock (NYSE: JPM) has more to go. JPM stock has increased from $79 to $117 off the recent bottom compared to the S&P 500 which increased almost 60%. The stock has underperformed the broader markets and is down 16% YTD. This is despite the fact that the recent quarters have seen higher revenues on a year-on-year basis – the top line has increased 7% to a consolidated figure of $62.1 billion for the last 2 quarters from $58 billion a year ago. That said, the earnings share a different story – they decreased 22% to a consolidated figure of $4.32 from $5.52 a year ago, mainly driven by a significant build-up in provisions for credit losses and is the main reason behind weak investor sentiment toward JPMorgan stock.

The company has seen some growth in revenue over 2018-2019, and its P/E multiple has also increased. We believe the stock is likely to see some upside in the near term despite the recent rally and potential weakness from a recession-driven by the Covid outbreak. Our dashboard Buy Or Sell JPMorgan Stock? provides the key numbers behind our thinking.

JPMorgan’s revenue increased 6% from $100.9 billion in 2018 to $115.6 billion in 2019, which translated into a 13% growth in adjusted net income over the same period. The net income benefited from a slight decrease in compensation cost as a % of revenue, improving the net income margin from 28.2% to 30%.

During the same period, the P/E multiple increased from just below 11x to around 13x. The multiple dropped in 2020 as the company has reported lower earnings over the last two quarters. While the company’s P/E is just below 11x now, there is an upside when the current P/E is compared to levels seen in the past years – P/E of 13x at the end of 2019.

Where Is The Stock Headed?

JPMorgan is a diversified financial services institution with operations spread across the world. The bank has delivered better than expected Q2 and Q3 results mainly driven by growth in Sales & Trading and investment banking segments. However, the same is not reflected in its earnings, as JPM has increased its provisions for credit losses to counter the risk of loan defaults on its sizable loan portfolio. On the flip side, the loan repayment capacity of the customers is tied to the economic slowdown. As the economy moves toward normalcy, the financial health of its customers is likely to recover, reducing the risk of loan defaults. Further, the bank is likely to re-start its share repurchase plan in the first quarter of 2021. Overall, JPMorgan stock is likely to see some upside in the near term.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

While JPMorgan stock  may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Google vs. Vertex Pharmaceuticals shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.


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