Great Time To Load Up On JP Morgan
The sell-off earlier last week created a great opportunity to load up on shares of JP Morgan at $64/share. I believe the media is underplaying what is happening in China. China is see a slowing down in demand for its exports. The Chinese are also seeing a collapse in exports to Europe and the U.S. Lots of U.S. companies are going to see massive problems in the third quarter.
The question investors should ask themselves is whether JP Morgan's business value been changed by the sell-off?
I believe that JP Morgan's underlining business value has not been changed by the sell-off.
JP Morgan is still one of the most profitable banks in the country with little exposure to China.
The company is one of the best managed and profitable banks in the world. From consumer banking to investment banking, JP Morgan stands out in every aspect of its business compared to the firm's competitors. It is the largest bank in the world with $2.4 trillion dollars in assets under its helm. JP Morgan operates in 60 countries and has been in business for over 200 years. Even after paying out $24 billion dollars in SEC fines for wrongdoing by Bear Stern and Washington Mutual, which the firm acquired in 2008, the firm was still profitable and the fines didn't hurt JP Morgan's earnings power.
JP Morgan provides its services through more than 5,000 branches and 18,000 ATM's. The bank has over 19 million active mobile users, who access numerous JP Morgan services through their phones.
JP Morgan has four business units:
- Consumer and Community Banking (CCB).
- Corporate and Investment Banking (CIB).
- Commercial Banking (CB).
- Asset Management (AM).
If I'm wrong and the Fed doesn't raise interest rates in September, JP Morgan will still be profitable. The only downside is that JP Morgan's economic earnings power will continue to be compressed. If the Fed starts to lift the interest compression off U.S. banks, then we will see banking profits move upwards. Even if short-term rates are raised 250bp and long-term rates are raised 150bp, this would add more than a $1 billion dollars to JP Morgan's pre-tax earnings. It would also result in boosting JP Morgan's return on CET1 Capital by 0.5% points. Raising interest rates a little bit would have an overall positive results for U.S. banks.
Under the Fed's normalization of interest rates, JP Morgan would see $30 billion in earnings in 2017. When you subtract $1.1 billion in preferred shares dividends and other distributions to shareholders would result in $28 billion in earnings in 2017. On a per share basis, JP Morgan could produce $7.57/share. Before the financial crisis JP Morgan traded at a P/E of 12x. If interest rates rise and JP Morgan trades for 12x its earnings, shares would sell for $91/share.
The $91/share value depends on the Fed raising rates in September, but even without the normalization, JP Morgan is undervalued at its current price of $59/share. Due to what is happening in China, JP Morgan is selling for 7.6x its operating earnings of $7.8/shares and 7.3x its 10-year average operating earnings of $8.04/share. At a reasonable multiple of 10x, JP Morgan's value is between $78.40/share and $80.04/share. If the Fed doesn't raise rates, shares of JP Morgan at its current price are undervalued.
Posted in ...Market Commentary