America’s highest quality and biggest bank — JPMorgan (NYSE:JPM) — on Tuesday reported strong fourth quarter numbers that healthily topped revenue and profit estimates. All the smaller numbers (net interest income, trading, etc) also topped expectations. JPM stock jumped by more than 2% on the news.
Meanwhile, during the conference call, management delivered bullish commentary about the state of the global consumer and corporate economies.
The broad takeaway from the report was simple. Global economic and banking conditions are growing more favorable by the week, and against this rapidly improving backdrop, JPMorgan is firing on all cylinders. As such, it should be no surprise that JPMorgan stock rallied toward record highs in response to the print.
It should also be no surprise that the most likely path forward for JPM stock is higher for longer.
Yes, valuation friction is a problem here. The stock is trading at its richest valuation in recent memory. It’s also trading at a significant premium to banking peers. But, this is the perfect environment for banks — with accelerating economic activity, rising rates, and sustained strong labor conditions — and JPMorgan is doing everything right to capitalize on this perfect environment.
As such, JPMorgan has enough fundamental firepower to relatively mute valuation risks in 2020. Over the next several months, shares will only go higher.
Perfect Environment for Banks
The global economy in 2020 is shaping up to be the perfect environment for all banks, including JPMorgan.
That is, the global consumer economy remains as healthy as ever. Everyone has a job, everyone is getting a raise, and everyone’s saving account remains large. At the same time, the global corporate economy is regaining steam as U.S.-China trade tensions ease with the signing of “phase one” of a trade deal. Even further, because global economic activity is picking back up, rates are rising again (after falling for much of 2019) and the yield curve has normalized (after inverting multiple times throughout 2018 and 2019).
Net net, 2020 projects to be a really good year for banks. Global consumer and corporate banking activity will remain robust, and the amount of money banks extract from that activity will go up as rates rise and the yield curve steepens.
Of note, in the banking sector, JPMorgan continues to differentiate itself as the cream of the crop. They have the best management (CEO Jamie Dimon is the only major bank exec who is still around after the 2008 financial crisis), the best numbers (JPM has topped both revenue and profit estimates for four straight quarters, a feat which no other bank can match), and the best innovation curve (see the company’s recent partnership with DoorDash, in addition its long list of tech integrations which dates back several years).
Big picture — banks are set to have a really good 2020, and JPMorgan is as good as it gets in the banking sector.
Valuation Risks are Overstated
The one big negative on JPM stock is valuation. But, this negative isn’t negative enough to knock JPM stock off its winning course in what projects to be a major “up” year for the company.
JPM stock presently trades at 13-times forward earnings. That’s above it’s five-year-average forward earnings multiple of 11.5x. It’s also above the 12x forward earnings multiples that Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) trade at. The same can be said for JPM’s 1.8x price-to-book multiple. It’s above both the stock’s five-year-average book multiple, and the book multiples at BAC and WFC.
In other words, JPM stock is expensive relative to history and peers.
But, this valuation premium is warranted by better execution and bigger growth. According to sell-side estimates, BofA projects as a 0.5%-and-under revenue grower over the next few years. Wells Fargo’s revenues are projected to drop. Over at JPMorgan, though, revenues are projected to rise in the 0.5% to 1% range.
Across the stock market, bigger growth warrants a bigger multiple. JPM stock is no exception to this rule. So long as JPMorgan can sustain its present operational momentum — and the bank likely will in 2020 — then a sub-10% valuation premium won’t knock shares off their winning course.
Bottom Line on JPM Stock
The bull thesis on JPM stock is simple: Banks are due for a big 2020. JPMorgan is the cream of the crop in the banking sector. Consequently, JPMorgan is set to have a really big 2020.
True, JPM stock is more richly valued than peers. But, by less than 10%. That’s not enough of a valuation premium to knock JPM stock off course in what projects to be a really good year for the company.
All in all, then, JPM stock will likely keep grinding to new highs over the next few months, despite some valuation friction.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
