Why This Most Controversial Bank Is An Attractively Undervalued Stock

Jan 10 2014, 1:44pm CST | by

Why This Most Controversial Bank Is An Attractively Undervalued Stock

Jamie Dimon is clearly the most controversial bank chief executive these days, and the beleaguered JP Morgan Chase (JPM) that he heads is high up there on the government’s probe-target list. So why is JP Morgan’s stock winging higher, close to its 52-week high of $59 a share, even after it had to pay more than $22 billion over the past year to settle federal criminal and civil actions, including its alleged roles in misrepresenting mortgage-bond sales and helping facilitate the Madoff Ponzi scheme?

Guts and glory? Well, that plus the fact that JP Morgan is one of the most well-oiled moneymaking machines and a highly profitable global financial institution that boasts of having assets of nearly $2.5 trillion with operations in more than 50 countries.

That, in part, is why Wall Street has remained steadfast in its faith in Jamie Dimon and JP Morgan despite the blizzard of legal troubles. And the major investment houses continue to buy and recommend its shares.

Of the 22 major Street analysts who track JP Morgan, 15 rate its stock as a strong buy, two as a moderate buy, and four as a hold. Only one recommends a sell. The Vanguard Group is the bank’s biggest shareholder with a 4.8% stake, followed by State Street which owns 4.4%, and BlackRock Fund Advisors, with 3.1%.

“We remain buyers despite the negative impact of the Madoff settlement on fourth-quarter earnings,” says David A. George, banking analyst at investment bank Robert W. Baird & Co. “We think investors are willing to trade the near-term litigation charges for better earnings visibility and quality in 2014,” he points out. Although the litigations costs have been high, he believes the company is making progress in reducing further legal risks.

The bank’s business fundamentals are in place. “We expect solid execution from core operations,” adds the analyst, and that’s a major reason why he says JP Morgan “remains a top (investment) idea.” Its  shares are trading at 9 times its 2015 earnings per-share vs. the 11 times large-cap bank median.

The moderating legal expenses, says George, should help improve returns and justify higher valuation  multiples for the stock. Without doubt, the regulatory and legal expenses have depressed near-term profitability, he notes, but he expects they have significantly reduced “tail risk” and should enable the bank to see “a normalized earnings walk” ahead.

Like most analysts, George expects JPM to post reduced earnings in 2013. George expects 2013 earnings will drop to $4.41 a share, down from his earlier forecast of $6,  and way below last year’s earnings of $5.20. But for this year, he and other analysts see profits leaping, to about $6 a share.

“We are attracted to JPM’s competitive position and believe it has addressed a great deal of its litigation concerns,” says Jason M. Goldberg, analyst at Barclays Capital, who rates the stock as overweight with a 12-month price target of $67 a share. He expects the greatest sources of potential upside earnings will be driven by higher loan growth and rising capital markets. The analyst’s price target of $67 implies a price-earnings multiple of 11 times his 2015 earnings forecast of $6.25 a share. For 2014, Goldberg expects JPM to earn $5.99 a share.

A much higher price target of $80 a share would be warranted, Goldberg figures, if loan growth accelerates sharply, capital markets activity heightens, and a more optimistic view on the global economy surfaces. In such a case, earnings in 2015 could go up to $6.95 a share, which would warrant an $80 upside price on an 11.5 times price-earnings multiple.

Gerard Cassidy, analyst at RBC Capital Markets, also rates JPM as outperform based in part on the bank’s strong earnings power and sizable capital return. The analyst is also impressed with JP Morgan’s diverse revenue stream, synergies in cost and savings, and its growing international presence.

And no matter how much the litigation and legal costs have spiraled, Cassidy still maintains that JP Morgan has a “best-in-class management team” – and “the best managed money-center bank of its size.”

Source: Forbes Business


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