This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Settlement Unshackles JPMorgan's Stock (Update 1)

JPMorgan's Cheap Stock

With remaining mortgage litigation risk apparently quite limited when compared to the $17.5 billion fourth-quarter tab, investors sitting on the sidelines may be tempted to build positions in JPMorgan's shares, which are trading at a relatively low multiple to forward earnings when compared to peers:

  • JPM's shares closed at $56.15 Tuesday and traded for 9.3 times the consensus 2014 earnings estimate of $6.02, among analysts polled by Thomson Reuters
  • Bank of America's (BAC - Get Report) stock closed at $15.20 Tuesday and traded for 11.3 times the consensus 2014 EPS estimate of $1.34
  • Wells Fargo (WFC) closed at $43.56 and traded for 10.9 times the consensus 2014 EPS estimate of $4.01
  • Citigroup (C) closed at $51.17 Tuesday and traded for 9.4 times the consensus 2014 EPS estimate of $5.43

So JPMorgan is the cheapest of the "big four" U.S. banking club on a forward price-to-earnings basis, despite being the second-best performer among the group, when looking at returns on average tangible common equity (ROTCE) over the past several years. 

According to data provided by Thomson Reuters Bank Insight, JPMorgan's ROTCE for the first three quarters of 2013 was 11.59%, despite its third-quarter net loss.  Over the previous three full years, the company's ROTCE ranged from 14.72% to 15.26%.

For Bank of America -- the most expensive of the big four on a forward P/E basis -- the ROTCE for the first three quarters of 2013 was 7.44%.  Over the past three full years, the company's ROTCE improved to 2.96% in 2012 from a negative 1.75% in 2010.

Wells Fargo has been the strongest earner among the big four during the post-crisis period.  The company's ROTCE for the first three quarters of 2013 was 17.86%, after a steady improvement to 16.70% in 2012 from 14.77% in 2010.

Citigroup's ROTCE for the first three quarters of 2013 was 8.95%.  Over the previous three years, Citi's ROTCE ranged from 4.80% to 8.04%.

Investors have had good reason to be wary of JPMorgan Chase, until now. 

"With the sizeable reduction in legacy mortgage exposure, our sense is JPM's pedestrian multiple will finally begin to edge higher," Sterne Agee analyst Todd Hagerman wrote in a note to clients on Tuesday.  He rates JPMorgan a "buy," with a price target of $65, which implies 16% upside for the shares over the next 12 months.

"Although the magnitude of the legal settlements in recent weeks has been staggering in the very least, our sense is investors will
now begin to hang their hats on the notion that the largest banks, including JPM, are clearly in the later innings in resolving legacy mortgage-related exposure--a clear positive that should begin to relieve some of the pressure on valuations and the group's pedestrian multiples heading into 2014/2015," Hagerman wrote.

Oppenheimer analyst Chris Kotowski was also upbeat on JPMorgan's prospects following the settlement.  "After expensing more than $20B in litigation charges since 2010, we believe that the future amounts will be relatively modest. In general, we believe 2014 earnings estimates are more likely to go up than down from here," he wrote in a client note Tuesday.

Kotowski rates JPMorgan "outperform," with a $73 price target, implying 30% upside for the shares.

Credit Suisse analyst Moshe Orenbuch is another believer in JPMorgan, with an "outperform" rating and a $65 price target.  In his firm's stock research report on Wednesday, Orenbuch estimated that a subsequent settlement of RMBS claims against Washington Mutual "would be less than $2.5bn," out of "nearly $10bn of [litigation] reserves left.

CLSA analyst Mike Mayo has a completely different opinion of JPMorgan Chase, with an "underperform" rating and 12-month price target of $53.00.  "'Big Brother Banking' remains more heated," Mayor wrote in a client note Wednesday, pointing out additional pressure being faced by JPM from investigations of libor and the foreign exchange market by multiple regulators, as well as the continuing investigations of the firm's energy trading activities and involvement in the Bernie Madoff Ponzi Scheme. 

"JPM was right to settle and it puts the worst mortgage issues behind, but it had to do so at a big price," Mayo wrote.

JPMorgan's stock was down 0.5% in afternoon trading Wednesday, to $55.90. 

JPM ChartJPM data by YCharts

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

Must Read: Schneiderman Details $13B JPMorgan Settlement

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $14.44 -0.82%
JPM $62.75 -0.71%
AAPL $94.18 0.47%
FB $117.69 0.09%
GOOG $697.69 0.68%


Chart of I:DJI
DOW 17,834.52 -56.64 -0.32%
S&P 500 2,081.43 +16.13 0.78%
NASDAQ 4,817.5940 +42.2360 0.88%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs