JPMorgan: Apple of the Banking Sector

NEW YORK ( TheStreet) -- Stifel Nicolaus analyst Chris Mutascio simply has no explanation for why JPMorgan Chase's ( JPM) shares are so cheap even as its shares continue to climb.

The stock was already attractively valued relative to the sector prior to earnings. Now, despite a strong earnings beat, the stock has only become cheaper, the analyst noted in a report Thursday.

JPMorgan shares trade at 7.7 times its 2013 earnings per share compared to the median price-earnings multiple of 9.6 the large-cap banks under Stifel's coverage. Prior to earnings, it traded at 8.6 times its expected 2013 earnings, compared to the median multiple of 9.9 of the group, so the discount has actually widened.

It now trades at a 35% discount to regional bank Comerica ( CMA) and at a 17% discount to its strongest peer, Wells Fargo ( WFC).

The stock is also not expensive on a price-to-tangible book basis. JPMorgan is trading at 1.24 times tangible book, in line with the sector.

What's more, JPMorgan's shares have actually risen 30% in 2012, outperforming most large-cap bank stocks.

That makes it something like the Apple ( AAPL) of the banking sector- a stock that seems to get cheaper, even as it continues to climb in price.

It is hard to say why the market is reluctant to pay a higher multiple for the stock. Investors may have been disappointed with the first quarter results, but analysts ended up raising estimates.

Maybe there was an element of unsustainability in the results, with trading revenues rebounding from a dismal fourth quarter and capital markets activity showing signs of softening in the second quarter. But as Mutascio points out, "we would argue that the mortgage banking gains posted in 1Q12 at many of our regional banks are not sustainable either."

Perhaps the stock is over-owned or weighed down by concerns regarding Europe. But JPMorgan isn't the only bank to be affected by Europe and will probably be better placed than most regionals to weather a prolonged period of low interest rates if Europe slips into a recession.

"In the end, we do not know why the valuation gap between JPM and the rest of our large cap bank coverage list has widened somewhat as a result of 1Q12 earnings," the analyst wrote." "We do know that JPM shares are trading at just 7.7x our 2013 EPS estimate and 1.2x tangible book value per share while maintaining a 2.8% dividend yield. Those are attractive on an absolute and relative basis, in our view."

--Written by Shanthi Bharatwaj in New York

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