JPMorgan Chase is coming off a strong performance in the first quarter of 2013, in which its net income was 15% higher on a quarter over quarter basis and 33% above its levels a year earlier. Earnings per share for the quarter were $1.59. Investment banking activities were a major contributor to the improved financials, though consumer banking showed a strong improvement from the fourth quarter 2012.
JPMorgan Chase as a value stock
The stock price is currently up over 40% in the last year, though with JPMorgan Chase’s asset values also increasing, its current market capitalization of about $200 billion is right in line with the book value of the bank’s equity. This valuation also comes out to about 10 times trailing earnings, though as we’ve noted the most recent quarter reflected considerable improvement over what JPMorgan Chase had done at various points in 2012. Analysts currently expect $5.72 in earnings for this year, making for a current-year P/E of 9, and we’d note that this figure already includes some expectation that business will cool relative to Q1.
So, JPMorgan Chase is trading at clear value levels in earnings terms, is not overpriced relative to book value either, and has been achieving growth in its business going by recent reports. As such, we think it is worth considering as a value stock, and we’d also note that at its current price and dividend level, it pays an annual yield of just under 3%. There are of course risks in investing in large banks, but for investors interested in the industry, we think this makes JPMorgan Chase quite competitive with its peers.
We maintain a database of quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to help us develop investing strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year. We can also track interest in individual stocks over time, and can see that billionaire Ken Fisher’s Fisher Asset Management owned nearly 13 million shares of JPMorgan Chase as of the end of March (find Fisher's favorite stocks). D.E. Shaw, a hedge fund managed by billionaire David Shaw, reported a position of 4.1 million shares (see D.E. Shaw's stock picks).
Bank of America and Citigroup are two other megabanks. Over the past year, these two peers have been struggling, with Bank of America’s earnings on a trailing basis being particularly low. Wall Street analyst forecasts place Bank of America at a valuation of 10 times forward earnings estimates, so it is actually valued at a premium to JPMorgan Chase in those terms even assuming the bank improves enough to hit analyst targets.
Citigroup’s forward earnings multiple is 9, so again, JPMorgan Chase is well in line with its peers despite what has been a more stable performance over the last year. If there’s a value case for these banks, it relies on the fact that they are priced at significant discounts to the book value of their equity -- 0.8 for Citi and 0.6 for BofA.
Wells Fargo is valued at a premium to JPMorgan Chase, with a P/B ratio of 1.5 -- quite high, in our view -- and even with great success in converting those assets into income trailing and forward P/Es of 12 and 11, respectively. Wells Fargo does have a reputation as a safer bank, and its earnings growth has also been good, but we aren’t sure it deserves that much higher a valuation.
We can also compare JPMorgan Chase to pure-play investment bank Goldman Sachs . This bank’s last quarterly report showed a small increase in revenue, and only 7% earnings growth, compared to the first quarter of 2012. While the stock is close to value territory -- for example, its forward P/E is 10 -- this isn’t a particularly low level compared to the other financial stocks we’ve considered here. In addition, JPMorgan Chase seems to be doing better -- including in its own investment banking unit -- and is valued more cheaply.
As a result, we’d prefer JPMorgan Chase to both Wells Fargo and Goldman. In addition, we think that Bank of America is too dependent on improvements on its bottom line from what the company has recently been doing to be an attractive value stock, even given its low P/B. Citigroup has been in a somewhat better situation, and it might be worth considering, but we still think that further research on JPMorgan Chase should be the first priority for investors interested in these financial stocks.