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) 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 data by YCharts
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-- Written by Philip van Doorn in Jupiter, Fla.
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