JPMorgan Chase (NYSE:JPM) has had a rough year with lower earnings and loan asset write-downs. In the year-to-date JPMorgan stock has fallen almost 30%. But surprisingly, its tangible book value per share (TBVPS) has stayed fairly steady. In fact, the stock looks like a good value here.
Third-quarter earnings for the big banks are due to be reported starting next week. JPMorgan will be one of the first to report, on Oct. 13.
Last quarter its TBVPS actually rose on a sequential basis from $59.94 per share to $60.98. And a year ago that number was $59.73. Expect a higher figure in next week’s report.
Loan Losses Filled Up
Keefe Bryant Woods (KBW) managing director Brian Kleinhanzl wrote that banks’ losses this quarter will not be as bad as in Q2. That is because they took large loan loss reserves last quarter. These reserves are based on a projected forward loan loss forecast model.
Therefore to take further losses, the bank would have to expect losses will be worse than they have already projected and for which they have already written down. In fact, that is likely one reason why JPMorgan’s TBVPS actually rose last quarter.
In addition, there is reason to believe that credit metrics have improved. More people are back at work than in Q2, albeit at lower levels than last year. Moreover, as bank analysts foresee that a novel coronavirus vaccine will gain traction next year, this will lead to higher economic activity. That will push up earnings projections.
Analysts expect Q3 earnings per share (EPS) of $2.14. This up from $1.38 last quarter but down 20% from $2.68 EPS from last Sept. quarter.
The KBW analyst wrote that management at most major banks believe that the bulk of their loan reserves have been built. However, it is still an “open question” as to whether these will be adequate.
Where This Leaves JPMorgan Stock
Right now analysts expect the bank will earn $6.00 a share this year and $8.73 next year. That puts JPMorgan stock, at $99.04 on Oct. 5, at 16.5 times 2020 earnings and just 11.3 times 2021 EPS.
Moreover, Morningstar indicates that the average P/E ratio for JPM stock over the past five years was 12.84x. Therefore, using 2021 EPS estimates, the stock should eventually trade at $112.09 per share. That represents a potential gain of 13.2% over today’s price of $99.04 (Oct. 5).
These are very reasonable valuations. In addition, the JPM stock has a 3.63% dividend yield with its annual $3.60 per share dividend.
Its average yield over the past four years has been 2.57%. Assuming the stock eventually reverts to this average yield, it would rise to $140.08 per share (i.e., $3.60 divided by 2.57%).
That represents a potential gain of 41.4% from here.
Marketbeat.com says that 24 analysts have an average price target on JPM stock of $111.32 per share. The range is from a high of $135 to a low of $80 per share. The average price represents a potential upside of 12.4% from here.
Three Values Reference Points
So now we have three value reference points for JPMorgan stock. The P/E based price target is $112.09, and the dividend yield-based target price is $140.08. Lastly, the analyst target average is $111.32.
As you may suspect, I am going to take the average of these three. It works out to $121.16 per share. That represents a gain of 22.3% from here. And don’t forget the 3.63% dividend yield. That means there is a potential total return of 25.9%.
And don’t forget that JPMorgan is one of the better banks in which you can invest. As one analyst points out, JPMorgan Chase is “likely to survive the 2020 crisis better than most and thrive in the longer term.”
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
