Today, we’re looking at JPMorgan Chase (NYSE:JPM). The company reported weak earnings recently — a massive 33% profit decline driven mostly by a 13% decline in investment banking income, which was offset by mortgage fees and other consumer fees, which were up 25%. This, however, is the game you must play with this company.
Earnings will be volatile because of its diversified financial business. The company obviously is involved in both investment and regular banking. It also has a Treasury & Securities Services segment that offers cash management and liquidity products to small and midsized companies, multinational corporations, financial institutions and government entities. Its Asset Management segment provides investment and wealth management to institutions, retail investors and high-net-worth individuals. It also has a credit card division, which it picked up when it purchased Chase Manhattan Corporation many years ago.
The driving factors regarding JPMorgan’s performance are rather wide-ranging. It is entirely beholden to macroeconomic conditions. If the world economy tanks, as we all know it did in 2008 and 2009 (and still is in other ways), so does JPMorgan Chase. In 2007, the company had net income of over $15 billion. Then, in 2008, it got clobbered. Net income went down to $5 billion. It recovered to $8.7 billion in 2009 and got back to $15.7 billion last year.
The stock price, however, doesn’t necessarily correlate to earnings. Like many financials, the stock is very subject to investor psychology. The stock was down 25% in August, when the markets were panicking. Now it has slightly recovered.
Evaluating the financials of a company like this isn’t necessarily productive. You can’t judge cash on hand and debt in the same way, because the balance sheet includes investments of the bank’s clients. Investment banks have extremely complex debt structures, and that doesn’t even include their exposure to derivatives and the debt instruments they issue to other companies.
The deal with this company’s stock is that you have to have faith that it is not hiding tons of toxic assets that could sink it, and that it isn’t overly exposed to derivatives that also could take it down. Two years ago I would have said to stay away. But the company is not at the center of rumors concerning these areas of exposure, and unless rumors of that sort surface about JPMorgan, I think it’s safe to consider it.
Stock analysts looking out five years on JPMorgan see annualized earnings growth at 9%. At a stock price of $32, on FY 2011 earnings of $4.63, the stock presently trades at a P/E of 7. At seven times earnings, on projected 2015 earnings of $7.36 per share (factoring in the 3.1% compounded dividend yield reinvested), we get a price target of $51. That’s not the greatest return given the overall risk that financials carry these days.
- I believe JPMorgan Chase is a sell for regular accounts.
- I believe JPMorgan Chase is a sell for retirement accounts.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.