JP Morgan Worth At Least $91 A Share
Since the 2008 financial crisis, some of the best value in the market has been found in the financial sector. The Big Four banks have all recovered from the financial crisis. There is still opportunities in the financial sectors, especially in banks like JP Morgan who will benefit from the Federal Reserve raising rates. JP Morgan is offering potential investors a lot of value at its current price. The firm is well positioned to strive when interest rates begin to normalize. When this happen, JP Morgan will see its earnings double from its current earnings of $5.34 to $7.53 a share. However, the company, like the rest of the industry, is facing legal headwinds which are far broader and deeper than anyone thought.
Over the last few years, JP Morgan has incurred $2.9 billion, $11.9 billion, and $5.0 billion in legal expenses for a total of $19 billion dollars. The firm is facing over a hundred cases with reserves of $5.5 billon to cover its legal costs. JP Morgan has faced more lawsuits than its top competitors, and was forced to have more reserves than their competitors. Citigroup (C) has $4 billion in reserves, and Bank of America (BAC) has $2 billion. JP Morgan saw its legal expenses increase by $687 million in the first quarter of 2015. While Citigroup and Bank of Americaboth saw legal expenses $387 and $370 million respectively in the first quarter. JP Morgan's legal expenses were 38% higher in the first quarter than the previous quarter last year.
Here are some of the major legal troublesJP Morgan is facing:
- Class action lawsuit on losses in synthetic credit portfolio.
- Investigation and Litigation over credit default swaps and exchange-traded derivatives.
- Investigation and Litigation over sales of government debts.
- JP Morgan is being sued for its underwriting of $1.5 billion loan syndication for General Motors (GM).
- Being sued for its underwriting and municipal derivative.
JP Morgan's management continues to de-risk the company's balance sheet which has given the firm fortress like properties. Managements effect in de-risking JP Morgan's balance sheet has resulted in the company having one of the strongest balance sheets in the industry. The company has one of the strongest you balance sheets in the banking industry.During the second quarter, JP Morgan reported $6.3 billion in earnings or $1.54/share on revenues of $24 billion. The firm saw loans-to-deposits of 61%, a 5% increase from the previous quarter last year. JP Morgan saw its core loan go up by 12%, which is a 5% increase from the previous quarter last year. The firm saw credit card sales and Merchant processing volumes increase in the second quarter. JP Morgan's tangible book value increased by 7% during the second quarter to $46.13. During the second quarter, JP Morgan returns $2.6 billion dollars to shareholders in the form of a buyback and dividend increase.
The current share price of JP Morgan doesn't take into context the underlining economic earnings of the company. Currently JP Morgan is selling for 8.7x pretax earnings, when it should be selling for at least 10x pretax earnings. When the Federal Reserve raises interest rates JP Morgan will see net interest income increase by 54 basic points or $10 billion a year. In a normalized interest rate environment, JP Morgan will see net income of $30 billion by 2017. Last year the company had $1.1 billion in preferred dividends and paid another $544 million in undistributed earnings allocated to other securities. This bring net income to $28 billion or $7.57/share in earnings in 2017. At a pre-crisis p/e of 12x brings JP Morgans value to $91 per share. Clearly the company's current market price isn't taking into account the underlining economic earnings base of the company. JP Morgan's underlining economic earnings has been depressed the last few years by the legal expenses and settlements. The firm has been losing on average of $0.25 to a $1.00 per share in earnings from these legal woes. If it wasn't for these legal woes, JP Morgan would have earning of $5.00 per share in 2013, and $6.00 per share last year. When the Fed begins to normalize interest rates, and the legal changes are behind JP Morgan, the company could easily see earning of $8.00 to $9.00 per share going forward in 2018.
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