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JPMorgan Moving Past Beached Whale: Analyst

NEW YORK ( TheStreet) -- Maybe the "London Whale" was a blessing in disguise for investors.

JPMorgan Chase has bounced back in a big way from the hedge trading losses in the firm's Chief Investment Office (CIO) first announced by CEO James Dimon in May, and the shares are still cheaply priced to book value and forward earnings.

And unlike other "cheapies," including Bank of America (BAC - Get Report) and Citigroup (C - Get Report), which may well be excellent buys for long-term investors based on low valuations and "normalized earnings" potential, JPMorgan Chase is already bringing home the earnings bacon.

JPM on Friday reported third-quarter earnings of $5.7 billion, or $1.40 a share, increasing from earnings of 5.0 billion, or $1.21 a share, during the second quarter, when the company booked $4.4 billion in losses from the CIO hedge trading debacle. In Sept. 2011, the company earned $4.3 billion, or $1.02 a share.

Here's a very quick snapshot of earnings performance and price valuations for the "big four" U.S. banks:
  • JPMorgan's third-quarter operating return on average assets (ROA) was 0.99% and its return on average tangible common equity (ROE) was 17.20%, according to Thomson Reuters Bank Insight. For the 12-month period ended Sept. 30, the company's ROA was 0.84%, and its ROE was 14.56%. The shares closed at $41.62 Friday, trading for 1.2 times tangible book value, according to Thomson Reuters Bank Insight, and for eight times the consensus 2013 earnings estimate of $5.21 a share, among analysts polled by Thomson Reuters.
  • For Wells Fargo (WFC - Get Report), the third-quarter ROA was 1.46% and its ROE was 16.69%. The company has set the earnings "gold standard" for the big four, with an ROA of 1.36% and an ROE of 15.14%, for the 12-month period ended Sept. 30. The shares closed at $34.25 Friday, and traded for 1.5 times tangible book value, and for 9.4 times the consensus 2013 EPS estimate of $3.64.
  • Citigroup announced its third-quarter earnings this morning, reporting an operating return on assets of 1.40% and a return on average common equity of 8.4%, excluding debit valuation adjustments (DVA), a tax benefit, and a $4.7 billion pre-tax loss on the company's sale of a 14% stake in the Morgan Stanley Smith Barney joint venture, and the write-down of its remaining stake in the joint venture. With these items included, the company's return on common equity was 1%. Leaving the messy third quarter aside, the company's ROA for the 12-month period ended June 30 was 0.55%, while its ROE was 7.22%. Citi's shares closed at $34.75 Friday, trading for 0.7 times their reported June 30 tangible book value of $52.70, and for 7.6 times the consensus 2013 EPS estimate of $4.55.
  • Bank of America will announce its third-quarter results on Wednesday. For the 12-month period ended June 30, the company's ROA was 0.52% and its ROE was 7.46%. The shares closed at` $9.12 Friday, trading for 0.7 times tangible book value, and for 10 times the consensus 2013 EPS estimate of 91 cents.

So JPMorgan Chase trades at a similar valuation to forward earnings as Citigroup, despite having a much stronger recent earnings track record. Wells Fargo has an even better earnings track record, which is reflected in a higher forward P/E than JPMorgan, as well as a higher price-to-book ratio. Bank of America's shares trade at a similar discount to book value as Citi, even though the company faces greater headline risk over its legacy mortgage mess.

Oppenheimer analyst Chris Kotowski said late on Friday that JPMorgan's stock was "we extraordinarily cheap at less than 7X" his 2013 earnings estimate of six dollars a share. The analyst said that the company had an "excellent" third-quarter, "even though credit and environmental costs remain high and the trading environment is still far from robust and seasonally low in 3Q."

With JPMorgan being forced to get its risk management house in order, which in hindsight, plays nicely in light of the continued focus of regulators on systemic risk, as they implement the new rules required by the Dodd-Frank bank reform legislation, the stage is set for the company to resume significant share buybacks next year. Dimon said during the earnings conference call on Friday that an early resumption of the stock repurchases during the first quarter would be "immaterial," it is likely to be very much a material event, after the Federal Reserve completes its next round of annual stress tests.
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