Equity Research
Student Investment Management Program
Columbus, OH
JP Morgan Chase & Co.
NYSE: JPM - $40.63
DIVERSIFIED FINANCIAL SERVICES
RATING: BUY
12-Month Price Target: $49.64
March 2, 2012
Royce West, Manager
614-227-2948
west_47@fisher.osu.edu
MARKET DATA
Market Cap
$154.4 Bil.
Price/Book Ratio
.88
Price/Tangible Book Ratio
* As of
1.32
47.80
52-Week Low
27.85
Dividend Yield
2012-2013 EPS and Revenue Estimates
12/31/2011
52-Week High
3-Mo. Avg. Daily Volume
Joshua Pladers, Analyst
217-412-5990
pladers.1@osu.edu
EPS
33,787,600
2.50%
REVENUE
SIM Analyst
Consensus
SIM Analyst
Consensus
2012E
$4.65
$4.71
$97.2B
97.2B
2013E
$5.27
$5.38
$101.0B
101.0B
Investment Thesis
Total Assets (Bil)
* As of
ROE
$2,265.8
12/31/2011
10.8%
* As of
ROTCE
Shares Outstanding (Mil)
12/31/2011
15.0%
3,900.4
Annual Dividend
Institutional Ownership
$1.00
74.4%
Insider Ownership
0.5%
1 Year Price History for JPM
JPMorgan Chase & Co. is a leading global financial services
firm with assets of $2.3 trillion, operations in more than 60
countries, and over 240,000 employees. Services are provided to millions of consumers, small businesses and many of
the world’s most prominent corporate, institutional, and
government clients. The company's activities are organized
into six primary business segments: Investment Bank, Retail
Financial Services (RFS), Card Services (CS), Commercial
Banking (CB), Treasury & Securities Services (TSS) and Asset
Management (AM).
I am recommending a BUY rating for JP Morgan Chase & Co. with a 12-month
price target of $49.64. This is currently 22.2% above the current price of 40.63.
As stated in the table above, my 2012 and 2013 estimates for EPS and revenue
are very close to consensus estimates. A slowly recovering economy will magnify the efforts of the firm’s first-class management and provide returns that will
be unparalleled amongst its peers in the financial sector.
Catalysts and Opportunities
•
JP Morgan Chase is undervalued
•
Superb management
•
Returns to shareholders including increase in quarterly dividend and
share repurchases
•
Record 2011 net income and improved yearly EPS
•
Conservatively financed
•
Excellent dividend payment history
•
Strong investments in the future
•
Improved economic conditions yielding improvement in loan demand and
credit quality
Risks
•
Q4 earnings down from previous year
•
2008 acquisitions
•
Increasing regulatory environment
•
High accounting and governance risk (AGR)
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TABLE OF CONTENTS
COMPANY OVERVIEW ....................................................................................... 3
OVERALL COMPANY ANALYSIS........................................................................ 3
SEGMENT ANALYSIS ......................................................................................... 4
Investment Bank ................................................................................................ 4
Retail Financial Services ................................................................................... 4
Card Services .................................................................................................... 5
Commercial Banking.......................................................................................... 6
Treasury & Security Services ............................................................................ 6
Asset Management ............................................................................................ 7
Private Equity..................................................................................................... 8
Summary of 2011 Segment Performance.......................................................... 9
COMPETITIVE ADVANTAGES and SUSTAINABILITY ....................................... 9
RECENT NEWS AND IMPORTANT EVENTS ................................................... 10
FUNDAMENTAL DRIVERS ................................................................................ 11
ECONOMIC AND SECTOR FACTORS ............................................................. 11
PROJECTED INCOME STATEMENT DISCUSSION ......................................... 12
COMPARISON OF THE “BIG FOUR BANKS” ................................................... 14
ROE AND PRICE-TO-BOOK ANALYSIS ........................................................... 14
AGR ANALYSIS ................................................................................................. 15
DISCOUNTED CASH FLOW ANALYSIS ........................................................... 15
DCF SENSITIVITY ANALYSIS ........................................................................... 16
VALUATION ANALYSIS ..................................................................................... 17
Multiple Valuation - Absolute ........................................................................... 17
Multiple Valuation - Comparisons to Industry and S&P 500 ............................ 18
CONCLUSION .................................................................................................... 18
APPENDICES .................................................................................................... 19
Appendix I – Complete Projected Income Statement ...................................... 19
Appendix II – Discounted Cash Flow Analysis ................................................. 20
Appendix III – DCF Sensitivity Analysis ........................................................... 20
Appendix IV - Sources ..................................................................................... 21
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Columbus, OH
COMPANY OVERVIEW
JP Morgan Chase & Co. (JP Morgan Chase) is a financial holding company. JPMorgan Chase’s principal bank subsidiaries are JP Morgan Chase Bank, National Association (JP Morgan Chase Bank, N.A.), a national bank with
United States branches in 23 states, and Chase Bank USA, National Association (Chase Bank USA, N.A.), a national bank that is the Firm’s credit card-issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities LLC (JP Morgan Securities), the Firm’s United States investment banking firm. The bank and nonbank subsidiaries of JP Morgan Chase operate nationally, as well as through overseas branches and subsidiaries,
representative offices and subsidiary foreign banks. The Company's activities are organized into six business segments: Investment Bank (IB), Retail Financial Services (RFS), Card Services (CS), Commercial Banking (CB),
Treasury & Securities Services (TSS) and Asset Management (AM).
OVERALL COMPANY ANALYSIS
Overall Company Performance
Key Factors
2011
Net income was a record $19.0B. Earnings per
share increased to $4.48 compared with $3.96 for
2010. The firm reported revenue of $99.8B, down
the previous year’s $104.8B. The firm’s total deposits increased to $1.1 trillion, up 21% from 2010.
Quarterly dividends were increased to $0.25 per
share and $9.0B worth of stock was repurchased.
Economic factors played a significant role in the
firm’s results. Management stated that ROE was
disappointing, but nonetheless acceptable. Gradually improving economic conditions have resulted in
solid loan growth. The company maintained its
goals of a fortress (strong) balance sheet ending
the year with a Basel I Tier 1 Common Ratio of
10.0% and a Basel III Tier 1 Common Ratio of
7.9%.
4Q11
Net income, EPS, and revenue amounted to $3.7B,
$0.90, and $22.2B respectively. Net charge-offs
were $2.9B in the fourth quarter, down 43% compared with the prior year. Three significant items
effected fourth quarter performance. Two o these
include a loss from debit valuation adjustments
(DVA), which is an expense for additional litigation
reserves, and a benefit from reduced loan loss reserves.
The quarter ended with modest improvements in
mortgage net charge-offs and delinquencies, as
well as non-performing assets declining by 33%.
Tightening of the firm’s credit spreads contributed
to the DVA loss.
Overall Company Outlook
Macroeconomic factors will play a critical role in JP Morgan Chase’s performance throughout the upcoming year.
Considering the economic boom in the early months of 2012, the turnaround and consolidation in the financial sector
combined with JP Morgan Chase’s strong market share and performance relative to its competitors, I believe the firm
can and will deliver satisfying results in 2012. Despite the somewhat disappointing outcome of 2011’s fourth quarter,
these same results were seen across the majority of the sector. JP Morgan increased dividends, bought back shares,
added numerous jobs and offices across all of its segments, and reported record earnings in 2011.
With increased regulation, such as Basel III and Dodd-Frank, a major impact will be felt to all financial firms, including
JP Morgan Chase. However, as the economy and financial sector as a whole recover, JP Morgan Chase will utilize its
superb leadership to magnify it’s already dominant market share and continue to expand its vast base of operations,
clients, and services.
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SEGMENT ANALYSIS
Investment Bank (IB)
The Investment Bank’s clients include corporations, financial institutions, governments and institutional investors. A
broad array of investment banking products and services are offered in all major capital markets,. These include but
are not limited to, advising on corporate strategy and structure, capital-raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage, and research.
2011
IB Segment Performance
Key Factors
Yearly revenue amounted to $26.2B. Noninterest
Lower compensation and non-compensation expenses were the driving factors in the reduced noninterest expense. Continued solid client revenue
mitigated the loss of fixed income market revenue.
Lower market volumes significantly affected equity
market revenue.
expense and pre-provision profit (operating income) were $16.1B and $10.2B respectively. Net
income was $6.8B. Operating margin for 2011 increased slightly to 38.7%. Fixed income market
revenue dropped 9% YoY. Equity market revenue
was down 25% YoY. Yearly ROE remained constant from the previous year at 17%.
4Q11
Net revenue was $4.4B, down from the prior year’s
4Q of $6.2B. This includes a $567M loss from DVA
adjustments. Net income was $726M, a 52% reduction from 4Q10. Expenses were down 29% from
4Q10. Fees dropped 39%. Quarterly ROE fell
sharply in 1Q11 from a high of 24% to 7%.
Tightening of the firms credit spreads contributed to
the large DVA loss. Lower net revenue and an
increased provision for credit losses was the major
cause of the sharp reduction in earnings. Despite
the reduction in fees, the firm continues to rank #1
in global Investment bank fees. Lower industrywide volume was the main contributing factor as to
the loss of these fees. Management contented
that the meager ROE for Q4 was acceptable due to
the economic environment.
Investment Bank Segment Outlook
Quarterly performance for the segment was disappointing. Numbers were down in almost every category in the
fourth quarter of 2011. However, when total numbers are observed for the year, JP Morgan’s Investment Banking
segment did quite well. Even when considering the pre-tax $567M Debit Credit Valuation loss, the division’s 2011
revenue grew .22% and operating margins increased by 4.5%. JP Morgan has repeatedly stated that DVA adjustments (whether positive or negative) do not reflect the daily operations of the business. Despite all the adverse
economic conditions and losses of fees over the past year, JP Morgan Chase has maintained its rank as #1 in
Global Investment Banking fees. Also, IB was the only reported segment that lowered its total 2011 noninterest
expense (excluding corporate/private equity). Look for the IB segment to continue improving its margins throughout
2012. In addition, barring additional negative DVAs, revenue and ROE should grow at a more favorable rate while
margins are expected to slowly increase.
Retail Financial Services (RFS)
The Retail Financial Services segment serves consumers and businesses by means of personal service at bank
branches, automated teller machines, online and telephone banking, as well as through auto dealerships and
school financial-aid offices. Customers are able to utilize more than 5,200 bank branches and 16,100 ATMs, as well
as online and mobile banking around-the-clock. More than 28,900 branch salespeople assist customers with checking and savings accounts, mortgages, home equity and business loans, including investments across the 23-state
footprint from New York and Florida to California. Consumers can also obtain loans at more than 16,200 auto dealerships and 2,200 schools and universities nationwide.
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2011
4Q11
RFS Segment Performance
Key Factors
Yearly revenue decreased to $26.5B. Noninterest
expense rose to $19.5B, while pre-provision profit
sharply fell to $7.1B compared to 2010’s value of
$13.9B. Net income also fell $1.7B. Operating
margin for 2011 fell 17.1% to 26.7%. ROE was
unchanged from 2010 and amounted to 7%
The reduction in income can be attributed to lower
interest revenue, which was caused by lower loan
balances. These lower balances were mainly effected by narrowing spreads and portfolio runoff.
Lower mortgage fees and debit card income also
effected revenues.
Quarterly net Income increased to $533M, compared with $459M from 4Q10. Revenue decreased
17% from previous year to $6.4B. Credit costs
amounted to $779M and expenses increased 6%
from the previous year to $4.7B.
As stated above, the large decrease in revenue can
attributed to lower loan balances and mortgage
fees. Additional expenses can be attributed to investments in new offices and staff, along with
higher mortgage production costs.
Retail Financial Services Segment Outlook
Overall, 2011 was a very challenging year for the Retail Financial Services segment. For the total year ended revenues, pre-provision profit, and net income all fell dramatically while non-interest expenses increased. Net revenue
was a dismal –16.4%. However, signs of improvement in the division are evident by the moderately better performance in 4Q11. Quarterly earnings increased from their 4Q10 values and credit costs fell. Also, a large portion of
the segment’s increase in expenses can attributed to investments in the future. The firm added to its sales force
and built 240 new branches despite the adverse economic conditions of 2011. One-hundred twelve of these new
branches were built in Q4 alone. The firm also increased its number of active mobile customers during the year; up
57% from 2010. In the upcoming year, look for the RFS segment’s results to improve from their 2011 values. However, the change will be a slow one and additional losses in revenue, pre-provision profit, and earnings can expected. The root cause of most of these lingering declines will be due to underlying assets such as mortgages
along with the acquisitions of Washing Mutual and Bear Stearns in 2008.
Card Services (CS)
Card Services is JP Morgan Chase’s credit card issuer. During 2010, Chase cards met more than $313 billion of
customer’s spending needs. A variety of products and services are offered such as Blueprint, Chase Freedom, Ultimate Rewards, Chase Sapphire, and Ink from Chase. CS engages in payment processing and merchant acquiring
primarily through “Chase Paymentech Solutions.”
2011
CS Segment Performance
Key Factors
Yearly revenue was up from 2010’s $17.2B and
Increased yearly segment revenues resulted from
lower partner revenue sharing, higher net revenue
sharing, and transfer of the Commercial Card
business from the TSS segment. As with the IB
and RFS segments, a portion of CS’s reduced
earnings can be attributed to lower spreads and
lower average loan balances. However, lower net
charge-offs and revenue reversals in the segment
partially offset this.
amounted to $19.1B. Non-interest expense increased to $8.0B. Pre-provision profit fell slightly to
$11.1B compared to 2010’s value of $11.4B. Net
income doubled in 2011 and amounted to $4.5B.
Operating margin was down 8.25% to 58.0%. Conversely, ROE dramatically increased from 2010 to
28%
4Q11
Net Income for the quarter fell slightly to $1.1B.
Revenue increased 1% from Q311, but was down 5%
from the previous year at $4.8B. Credit costs
amounted to $1.1B and expenses were up 8% YoY
at $2.0B. Net charge-offs were dramatically down
45% from 2010.
The reduction of net income was caused primarily
by a $1.7B lower reduction in the allowance which
was offset by lower net charge-offs. Credit costs
fell, which reflected lower estimated losses.
Higher marketing expenses and the inclusion of
the Commercial Card business drove the increase
in expenses.
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Equity Research
Student Investment Management Program
Columbus, OH
Card Services Segment Outlook
Card services performed exceptionally well in 2011. Yearly revenues improved by 11.5% from 2010, while net income increased over 50% and ROE increased 12% from their 2010 values. However, operating margin decreased
and expenses increased. Many factors can attributed to CS’s success. The addition of Commercial Card business,
the sale of the Kohl’s portfolio, lower net charge-offs, and lower allowance. Although some of these items can be
considered extraordinary and not a recurring phenomena, Card Services continues to provide customers with innovative new products and diverse methods of account management and access. When viewed against the vast economic challenges of 2011, CS’s results are impressive. Add the recovering economy to the average consumer’s
increased desire to purchase discretionary goods and we can expect CS to continue to deliver exceptional results.
Commercial Banking (CB)
Commercial Banking provides services to nearly 24,000 clients nationally. These include corporations, municipalities, financial institutions, not-for-profit entities and nearly 35,000 real estate investors/owners. CB partners with the
firms’ other businesses to provide solutions, including lending, treasury services, investment banking and asset
management in order to meet its clients’ domestic and international financial needs.
CB Segment Performance
Key Factors
2011
Revenue for 2011 amounted to $6.4B. Non-interest
expenses rose slightly to $2.3B. Pre-provision
profit improved from 2010’s value of $3.8B to
$4.1B. An improvement in net income of $2.4B was
reported in 2011. Operating margin also increased
slightly by roughly 1% to 64.5%. ROE improved by
4% to a value of 30% YoY.
Growth in liability and loan balances, offset by
spread compression on liability products drove increases in revenue. Increased non-interest expenses can be attributed to a higher headcount
combined with increased regulatory deposit assessments. The improved results in earnings were
caused primarily by higher revenues and lower provisions for credit losses.
4Q11
Record quarterly revenue was reported, and
amounted to $1.7B. Net income increased $643M;
up 21% from the previous year. EOP (End of Period) loan balances were up 13% from 4Q10. Record average liability balances were reported at
$99.1B; a 35% increase YoY. Expenses increased
YoY by 4% to 579M.
EOP loan balances increased for the 6th consecutive quarter, while Middle Market loans rose for the
7th consecutive quarter and were up 17% YoY.
Commercial Banking Segment Outlook
Like the Card Services segment, 2011 was a great year for JP Morgan Chase’s Commercial Banking division. With
the exception of a moderate increase in non-interest expense, CB made great strides in almost every reporting
category. While we do not see the dramatic performance increases in certain areas as we did in CS, CB has made
noticeable and consistent improvements across its operations. 2011 Revenue growth was a solid 6.3% and ROE
rose by 4%. As with other segments, net charge-offs dropped from their 2010 values and the allowance was also
down. During the fourth quarter of 2011 the division set a new quarterly revenue record and also encountered noticeable increases in loan balances. Expect more of the same consistent growth and improvements in revenue,
earnings, ROE, and operating margins in 2012.
Treasury & Security Services (TSS)
Treasury and Security Services provides transaction, investment and information services, and is a cash management provider and global custodian. Treasury Services (TS) provides cash management, trade, wholesale card and
liquidity products and services to small and mid-sized companies, multi-national corporations, financial institutions
and government entities. TS partners with IB, CB, RFS and Asset Management businesses to better serve clients
needs. Its Worldwide Securities Services holds, values, clears and services securities, cash and alternative investments for investors and broker-dealers. It also manages depositary receipt programs on a global scale.
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TSS Segment Performance
Key Factors
2011
Total revenue during 2011 increased to $7.7B. Non
-interest expense rose to $5.9B; up from 2010’s
value of $5.6B. Pre-provision saw little change over
the year and remained steady around $1.8B.
Yearly earnings saw a moderate improvement from
2010 amounting to $1.2B. ROE remained unchanged from 2010 at 17%. Operating margin fell
slightly during 2011 from 24.1% to that of 23.9%.
Revenue growth in 2011 can be traced to higher
deposit balances and loan volumes. These were
partially offset by the transfer of the Commercial
Card business to in 1Q11.
4Q11
Quarterly revenue grew to $2.0B; up 6% from
4Q10. Expenses for the quarter rose to $1.6B; a
6% increase. Net Income fell 18% QoQ to $250M.
Liability balances rose sharply by 42% YoY. Assets
under custody increased 5% from 2010 to $16.9T.
The 6% YoY rise in expenses resulted primarily
from the transfer of the Commercial Card business
to Card Services. A higher GBC credit allocation
along with higher provisions for credit losses accounted for the large 18% decrease in earnings.
Lower rates on alternative investments and the low
interest rate environment in general affected the
sharp 42% increase in liability balances.
Treasury & Security Services Segment Outlook
When first observed, one can see Treasury & Security Services provides value to the firm through its relatively consistent performance (not unlike the Commercial Banking segment). One also notices the extremely large amount of
assets that the division manages and holds (about $17T). Trade loans also increased rapidly contributing to segment performance. In the fourth quarter alone, EOP trade loans rose 73% to $36.7B. Also, TSS has shed many
unprofitable businesses and seen significant performance increases in its two subdivisions (Worldwide Securities
Service and Treasury Services). A broadening amount of assets will further fuel segment growth and improve margins in 2012.
Asset Management (AM)
Asset Management provides its clients with investment and wealth management. AM clients include institutions,
retail investors and high-net-worth individuals in markets throughout the world in addition to global investment management in equities, fixed income, real estate, hedge funds, and private equity. Liquidity products are also offered
and include money-market instruments and bank deposits. AM also provides trust and estate banking and brokerage services to high-net-worth clients, and retirement services for corporations and individuals. The majority of AM’s
client assets are focused in actively managed portfolios.
AM Segment Performance
Key Factors
2011
Revenue improved from 2010’s amount of $9.0B to
$9.5B. Non-interest expense rose to $7.0B. Preprovision profit fell from $2.9B in 2010 to $2.5B in
2011. Net income also fell during the year to the
amount of $1.6B. ROE for the year amounted to
25%; down 1 % from 2010. Operating margin fell
from 32% to 26.6% in 2011.
A number of factors contributed to the yearly loss
in revenue. These include lower loan related
revenue, lower valuations of “seed capital investments” (which offset a gain in net interest revenue), lower performance fees, and the effects of
lower market levels. Reductions in earnings can
be traced to lower net revenue .
4Q11
Quarterly revenue dropped to $2.3B. Expenses were
down from 4Q10 and amounted to $1.8B. Net income fell an astounding 40% YoY. Assets under
management and supervision increased to $1.3T and
$1.9T YoY respectively. ROE fell significantly from
the previous three quarters and amounted to 18%.
The reduction in revenue can be attributed to
lower performance fees in addition to lower loan
related revenue. Net inflows to liquidity products
and long-term products contributed to the gains in
AUM (assets under management)
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Asset Management Segment Outlook
Asset Management saw mixed performance during 2011. Yearly revenue increased, but noninterest expense rose
along with further decreases in pre-provision profit, earnings, ROE, and operating margin. There are additional
bright spots amidst the segment other than increased revenue. Assets under management that ranked in the top
two quartiles for investment performance were 78% over the past 5 years, 72% over the past 3 years, and 48%
over 1 year. Also, customer assets in four and five-star rated funds amounted to 43% of all ranked mutual fund assets. Since the financial crisis of 2008, the division has been steadily declining across many categories. However,
it showed signs of improvement in 2011. A steadily improving economy, superb management, and time are needed
until AM can regain its impressive pre-crisis performance levels. For the year 2012, expect very moderate improvements, if any, in most areas of the segment.
Corporate/Private Equity (C/PE)
The Corporate/Private Equity sector consists of Private Equity, Treasury, the Chief Investment Office, corporate
staff units and expense that is centrally managed. Treasury and the Chief Investment Office manage capital, liquidity and structural risks of the Firm. The corporate staff units include Central Technology and Operations, Internal
Audit, Executive Office, Finance, Human Resources, Marketing & Communications, Legal & Compliance, Corporate
Real Estate, General Services, Risk Management, Corporate Responsibility and Strategy & Development. One
other centrally managed expense includes the Firm’s occupancy and pension-related expense, net of allocations to
the business.
*NOTE: JP Morgan Chase does not consider Corporate/Private Equity as one the firm’s six main business segments. However, they do report it as a separate 7th division in the company’s income statements. Also, JP Morgan
Chase consistently comments on and provides measures for C/PE in their financial statements and quarterly earnings reports. The firm treats it like every other division. Thus, it deserves our attention as much as any of the other
six segments.
C/PE Segment Performance
Key Factors
2011
Total revenue for 2011 was $4.2B, down from
2010’s $7.3B. Non-interest expense decreased
during the year to $4.1B. Pre-provision profit was
$2.0M; down sharply from 2010. Net income
amounted to $802M. ROE for the segment is not
meaningful. Operating margin was down 4.7% at
36.9% for 2011.
Write-downs on private investments contributed to
lower revenues (primarily regarding PE’s negative
revenues) and the absence of prior year gains from
sales. Lower securities gains also contributed to
revenue losses. The fall in noninterest expense
was effected by lower actual litigation expense.
4Q11
Quarterly net revenue for the Private Equity (PE)
sub-segment was negative and amounted to
-$113M. Noninterest expense decreased from
4Q10 to $28M.
PE portfolio value of $7.7B (5.5% of stockholder’s
equity less goodwill). Noninterest expense for the
quarter included a $528M pre-tax increase in litigation reserves related to mortgage-based matters.
Corporate/Private Equity Outlook
Corporate/Private Equity is a very hard segment to forecast and project performance measures for. There are often
many rapid and incredible fluctuations in certain measures. For example, net revenue growth in the segment from
2008 to 2009 was –12,625.00%. Consequently, we are forced to remove outliers (such as certain measures during
the financial crisis) and take simple averages to predict reasonable growth rates and margins. During 2011, there
was one wild fluctuation which resulted in a 43% drop in revenue from 2010. For the upcoming year, expect more
of the same type of performance from the ‘ghost-like’ private equity segment. Look for very moderate increases
and/or decreases in key measures. However, we always need to be aware of the segment’s past volatile nature.
Thus, realistically we can reasonably expect more unpredictable fluctuations in performance in the future.
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Summary of 2011 Segment Performance
% of Revenue
% of Noninterest Expense
0.04
0.07
0.10
0.26
0.11
Investment Bank
0.26
Retail Financial Services
0.08
Card Services
0.06
Retail Financial Services
Card Services
0.09
Commercial Banking
Treasury & SecuritiesServices
Commercial Banking
Treasury & SecuritiesServices
0.04
Asset Management
Asset Management
Corporate/Private Equity
0.19
Corporate/Private Equity
0.13
0.27
0.31
% of Pre-Provision Profit
% of Net Income
0.07 0.00
0.04
0.08
0.05
0.28
Investment Bank
Retail Financial Services
0.11
Investment Bank
0.06
0.36
Card Services
Commercial Banking
0.30
Investment Bank
0.19
Retail Financial Services
Card Services
Commercial Banking
0.12
Treasury & SecuritiesServices
Treasury & SecuritiesServices
Asset Management
Asset Management
Corporate/Private Equity
Corporate/Private Equity
0.09
0.24
COMPETITIVE ADVANTAGES AND SUSTAINABILITY
Market Share
JP Morgan has an unbelievably large market share. In terms of assets and deposits, it ranks as one the largest
banks in the United States.
Industry
The diversified financial services industry is concentrated and has numerous oligopolistic qualities. These include
securities underwriting, and consistent fees for credit and debit cards. Fees are also relatively stable and uniform
for retail banking activities, as well.
High Entry Barriers
Strict regulation combined with high requirements for capital are two major factors that prevent up and comers from
entering into the industry and taking a bite out of JP Morgan Chase’s market share. The firm’s existing scale and
distribution advantages also discourage new entrants. Small banks that do enter are usually absorbed by larger
institutions.
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Large Scale and Size
JP Morgan Chase has a very large presence via its retail branches throughout the United States. The firm uses the
combined advantages of its size, infrastructure, and technology to attract high amounts of retail deposits at lower
cost than most of its competitors. JP Morgan Chase also uses its lending relationships to gain further market share
in its Investment Banking segment. Many competitors lack a deposit-taking lending business of the magnitude that
JP Morgan Chase employs.
Management Team
JP Morgan Chase has one the of the best management teams in the financial sector at its disposal. The firm is one
the few in the entire sector that came out of the 2008 financial crisis better than when it went in. Superb internal risk
management and controls have allowed the business to avoid many of the costly mistakes that competitors have
made. Additionally, Management continues to return capital to shareholders in the form of share repurchases and
boasts an astounding dividend record.
The Way Forward
The company is not only a leader when it comes to the diverse array of activities and responsibilities of being one of
the world’s most prominent banks. The company gives back to the communities and businesses that have made JP
Morgan Chase what is today. Through its The Way Forward Program, JP Morgan Chase supports continued economic recovery and simultaneously prepares for the future. The firm raises trillions of dollars for credit-worthy businesses and consumers, raises billions of dollars in support of not for profit services, sponsors thousands of scholarships and grants, and provides assistance to hundreds of thousands of distressed homeowners through outreach
counseling programs.
RECENT NEWS AND IMPORTANT EVENTS
•
On December 19, 2011, JP Morgan Chase announced that it had raised over $14 billion in Depository Receipts
(DRs) by corporate issuers. DR volume hit new records with a simultaneous increase in trading value.
•
On December 13, 2011, JP Morgan Chase declared a common stock dividend of $.25 per share. This was a
significant increase from previous years.
•
On November 28, 2011, Chase announced that small business cardholders can earn rewards faster using their
“Ink Bold” credit cards. Benefits that the firm is providing its loyal customers with include airport lounge access,
no foreign transaction fees, no expiration of points, free employee cards, new built-in security features, and
unlimited access to a team of card specialists to handle unique service inquiries. The firm previously enhanced
rewards for its Ink Classic and Ink Cash cards in 2Q11.
•
On September 20, 2011, JP Morgan added new supply chain management functionalities and features to its
Trade Channel platform in its TSS segment. The enhanced Trade Channel platform provides its users with real
-time access to critical flow information. Many of these new features are unique and cannot be found anywhere
else in the industry.
•
On August 15, 2011, JP Morgan Worldwide Securities Services announced that the firm has enhanced over
2,100 global custody trade instruction deadlines. This initiative, leverages the full power of the firm’s global
processing capabilities and technology in order to improve clients' trading experience across the majority of
J.P. Morgan's global custody network.
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FUNDAMENTAL DRIVERS
Release and Improvements of New Products and Services
JP Morgan Chase is constantly innovating and creating new products and services. It also strives to improve the
services and products that its customers already use and own. Throughout 2011, the firm made many significant
improvements and enhancements to products such as credit cards, ATMs, and personal accounts, among many
others. It also enhanced the operations of its segments such as TSS’s Trade Channel Platform.
New Financing
Throughout 2011, JP Morgan Chase initiated new financing programs for customers such as Chrysler, Jeep, Dodge
and Ram Truck dealers across the U.S. In 2011 alone, the firm provided $252 billion of credit to consumers and
$545 billion of credit to businesses.
Prospects of Segments
In 2011, JP Morgan Chase’s Investment Banking Segment retained its ranking as number one in Global Investment
Banking fees despite the dismal economy and new regulations. Card Services and Commercial Banking also performed quite well for the year. Retail Financial Services is one the company’s biggest contributors to profits and
revenues, but did not perform as well as other segments. However, when assets from previous acquisitions are
able to be removed and/or retired, expect RFS to re-establish itself as one the many shining divisions of JP Morgan
Chase. A more in depth analysis of the firm’s segments can found on pages 4-9.
Litigation from Acquisitions and Mortgages
JP Morgan continues to face challenges and difficulties regarding its acquisition of Washington Mutual and Bear
Stearns in 2008 along with lawsuits regarding mortgages. The firm has a large pool of pre-paid expenses for trials
and litigation and continues to make increasing contributions to its litigation reserve in preparation for more lawsuits.
ECONOMIC AND SECTOR FACTORS
Regulatory Environment
Dramatically increasing regulation and restrictions on activities such as lending are having a tremendous impact on
JP Morgan and the sector as a whole. The most commonly discussed regulatory items include the Basel III Accord,
the Volker Rule, and the Dodd-Frank Act. Although all three present challenges, the only one that will have a material impact on the firm is the Dodd-Frank Act. It is expected to reduce yearly revenues by $1.0 billion per year. This
amounts to about 6% of earnings after tax.
Low Interest Rates
In recent years the FED has made an effort keep interest rates at very low levels in order to prevent the price level
from falling and promote price stability (an essential component to economic growth). Further decreases could impair money market mutual funds along with bank profits. This would in turn alter the flow of finances from households to firms and also have a negative impact on bank’s net interest margins.
European Exposure
Although this on-going debacle has had a significant impact on many financial institutions, JP Morgan Chase has
positioned itself well and it’s exposure to this risk is small. This is mainly because the firms total exposure in Europe
is minimal when compared to tangible book value and the firm’s ability to generate earnings.
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Recovery of Financial Sector
The financial sector showed dismal performance in 2011, and was one of the worst performing segments of the
S&P 500. However, as we have seen in the first quarter of 2012, the sector is recovering rapidly and can be expected to regain much of its former market share as the economy continues to improve.
PROJECTED INCOME STATEMENT DISCUSSION
Main Assumptions in Forecast
Please refer to Appendix I on page 19 for my complete Projected Income Statement of JP Morgan Chase &
Co.
Election Year
The current year, 2012, is an election year. One can expect no sharp changes (either positive or negative) in the
policies of both parties in congress. New policies will depend on the winner of the election. If the Democrats lose
the White House, expect the Republican’s new policies to make 2013 quite different than the previous four years. I
forecasted 2013 assuming that the balance of power would shift to the right and moderate overall improvements
would be made from 2012E.
Economic Factors and Cyclicity
I took a vaguely pessimistic viewpoint of how the economy will operate in the next two years (2012 and 2013). I do
expect overall improvements, but I believe they will be minor. Numerous factors play a role in this decision. Earlier
in January, Economist Dan Roberts predicted a dismal future for the United States Economy with very moderate
improvements in current measures and troubling years ahead due to the financial situation of the country. Social
Security will be a huge problem that refuses to go away. Also, I was very conservative in most measures of expected revenue growth and improvements/losses of operating margin, I believe that the economy is cyclical and will
eventually recover. However, it’s dangerous and naïve to believe that over the next two years the economy will rise
to levels that were seen pre-housing crisis in 2007 and pre-tech bubble in 1999.
JP Morgan Chase Segment Performance
The analysis for each segment in 2011 and 4Q11 can be found on pages 4-9 of this report. This, combined with the
past performances from 2006-2010 played a major role in my forecasted income statement. One must be cautious,
however, due to the years 2008 and 2009. As we all painfully remember, these were the years during the financial/
housing crisis. One must be aware of large and sudden fluctuations YoY in certain measures when making predications. Consequently, we must find the specific outliers and do our best to either discard them, or judge if they are a
realistic and recurring event in the business.
*The graphs below and on the next page show my forecasted revenues, growth rates, and operating margins.
Projected Segment Revenue (Including 2006-2011 Historical Values)
Segment
(Millions)
NET REVENUE
Investment Bank
Retail Financial Services
Card Services
Commercial Banking
Treasury & Securities Services
Asset Management
Corporate/Private Equity
Total Company
Consensus
FY
2013E
27,864
23,168
20,898
6,612
7,798
9,830
4,507
100,677
101,000
FY
2012E
26,537
23,884
20,289
6,498
7,721
9,591
4,193
98,713
97,200
FY
2011
4Q11
3Q11
2Q11
1Q11
FY
2010
FY
2009
FY
2008
FY
2007
FY
2006
26,274
26,538
19,141
6,418
7,702
9,543
4,151
4,358
6,395
4,814
1,687
2,022
2,284
638
6,369
7,535
4,775
1,588
1,908
2,316
(123)
7,314
7,142
4,761
1,627
1,932
2,537
2,097
8,233
5,466
4,791
1,516
1,840
2,406
1,539
26,217
31,756
17,163
6,040
7,381
8,984
7,301
28,109
32,692
20,304
5,720
7,344
7,965
6,513
12,335
23,520
16,474
4,777
8,134
7,584
(52)
18,170
17,305
15,235
4,103
6,945
8,635
4,419
18,833
14,825
14,745
3,800
6,109
6,787
14
99,767
22,198
24,368
27,410
25,791
104,842
108,647
72,772
74,812
65,113
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Projected Segment Revenue Growth and Operating Margins (Including 2011 Historical Values)
NET REVENUE GROWTH
Investment Bank
Retail Financial Servic es
Card Services
Commercial Banking
Treasury & Securities Services
Asset Management
Corporate/Private Equity
Total Company
FY
2013E
5.00%
-3.00%
3.00%
1.75%
1.00%
2.50%
7.50%
1.99%
FY
2012E
1.00%
-10.00%
6.00%
1.25%
0.25%
0.50%
1.00%
-1.06%
FY
2011
0.22%
-16.43%
11.52%
6.26%
4.35%
6.22%
-43.14%
-4.84%
OPERATING MARGIN
Investment Bank
Retail Financial Services
Card Services
Commercial Banking
Treasury & Securities Services
Asset Management
Corporate/Private Equity
Total Company
FY
2013E
44.00%
4.00%
30.00%
4.00%
60.00%
2.00%
65.50%
0.50%
24.50%
0.50%
26.25%
0.25%
6.50%
5.00%
40.59%
2.88%
FY
2012E
40.00%
1.34%
26.00%
-0.68%
58.00%
0.03%
65.00%
0.49%
24.00%
0.12%
26.00%
-0.63%
1.50%
1.45%
37.71%
0.77%
FY
2011
38.66%
4.52%
26.68%
-17.07%
57.97%
-8.25%
64.51%
0.91%
23.88%
-0.20%
26.63%
-5.34%
0.05%
-12.91%
36.94%
-4.69%
SIM Analyst Predictions vs. Consensus
2012: Consensus revenue estimates for JP Morgan Chase in 2012 amounted to $97.2B with a high of $104.0B
and a low of $91.7B. My estimate for 2012 revenue totaled $98.7B for 2012. This estimated value is slightly
above the consensus, which reflects my belief that JPM will show stronger firm-specific related revenue generation amidst a slowly recovering economy and the rebounding of the financial sector. However, as seen in the
table above, I expect total 2012 growth to decrease by about 1.1%.
2013: Consensus estimates for the firm’s annual revenue in 2013 amounted to $101.0B. Analysts projected a
high of $109.0B and a low of $94.2B. My prediction for yearly revenue in 2013 was $100.7B. My value is
about $0.3B below the consensus, and this shows that while I do believe the company will generate better
revenues (1.99% in the table above) in 2013 than it did 2012 and 2011, over-optimistic predictions for revenue
growth and economic recovery beyond the next year can be dangerous. Thus, in this case it is best to be
slightly below the consensus estimate.
Projected Provision, Pre-Provision Profit, and EPS
(Including 2011 Historical Values)
SIM Analyst EPS Predictions vs. Consensus
2012: Consensus estimates for JP Morgan Chase’s
annual 2012 EPS came out to $4.71 per share. The
high and low estimates were $5.32 and $4.35 per share
respectively. My prediction was very close to the overall consensus, but was lower by $0.06 per share. This
takes into account my belief that the firm will set aside a
higher provision for credit losses in preparation for the
uncertainty of the election year and growing regulatory
burdens.
2013: As was the case in 2012, my EPS prediction
understates the consensus estimate to a small degree
(about $0.11 per share). While I do believe that there
will be a much greater EPS increase for the firm in 2013
than in 2012, I took more conservative predictions when
forecasting for items such pre-provision profit and provision for credit losses. As previously stated, due to the
2012 election year, we cannot justifiably make too bold
of predictions because situations for policy change will
be drastically different depending on what party controls
Congress and/or the White House.
PROVISION FOR CREDIT LOSSES
Investment Bank
Retail Financial Services
Card Services
Commercial Banking
Treasury & Securities Services
Asset Management
Corporate/Private Equity
Total Company
PRE-PROVISION (OPERATING) PROFIT
Investment Bank
Retail Financial Services
Card Services
Commercial Banking
Treasury & Securities Services
Asset Management
Corporate/Private Equity
Total Company
Net income
Per common share data
Basic earnings
Income from continuting operations
Net income
Diluted earnings
Income from continuting operations
Net income
Consensus
FY
2013E
(200)
4,000
3,600
200
50
60
45
7,755
FY
2013E
12,260
6,950
12,539
4,331
1,911
2,581
293
40,864
FY
2012E
(200)
4,500
3,800
250
50
70
50
8,520
FY
2012E
10,615
6,210
11,768
4,224
1,853
2,494
63
37,226
FY
2011
(286)
3,999
3,621
208
1
67
(36)
7,574
FY
2011
10,158
7,080
11,096
4,140
1,839
2,541
2
36,856
FY
2013E
21,273
FY
2012E
18,515
FY
2011
18,976
5.29
5.29
4.68
4.68
4.50
4.50
5.27
5.27
5.38
4.65
4.65
4.71
4.48
4.48
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COMPARISON OF THE “BIG FOUR” BANKS
*Data from yahoo.finance.com
on 3/2/2012
Market Cap:
Employees:
Qtrly Rev Growth (yoy):
Revenue (ttm):
Operating Margin (ttm):
Net Income (ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
JP Morgan
Chase
Bank of America
(BAC)
Wells Fargo
(WFC)
Citigroup
(C)
154.47B
260,157
-16.30%
89.66B
30.78%
17.57B
4.48
9.07
1.14
1.71
87.25B
282,000
27.10%
80.04B
13.37%
84.00M
0.01
813.00
0.77
1.09
164.95
N/A
0.90%
73.03B
36.70%
15.02B
2.82
11.09
1.03
2.28
99.87B
N/A
5.80%
66.58B
22.01%
10.74B
3.63
9.41
0.88
1.50
*ttm=Trailing Twelve Months (as of Dec 31, 2011)
*yoy=Year Over Year (as of Dec 31, 2011)
The table shown above lists comparative information for JP Morgan compared to the three other “Big Four” banks in
the United States. Each of these banks hold assets numbering in the trillions and most personal and corporate account holders do business in some form with one these four institutions. JP Morgan ranks atop the other four firms
in most measures. Quarterly revenues were significantly down compared to the other three banks, however, this is
too short of a time period to make any definitive conclusions on. Also, despite its dismal fourth quarter, the firm still
managed to surpass its competitors in yearly revenue and net income. Note that the PEG ratio is equivalent to the
P/E ratio divided by annual EPS growth. It is a widely used measure that is often favored over normal P/E due to its
incorporation of growth. In the same manner as the P/E ratio, a lower PEG ratio means that the firm is more undervalued. With an industry average of about 1.09, this is one the few valuation measures that implies that JP Morgan
is slightly overvalued.
ROE AND PRICE-TO-BOOK ANALYSIS
The two tables on the left
show historical values for JP
Morgan Chase’s Return on
Equity (ROE) and Price to
Book ratio. The EBITDA margin can be ignored (for reasons stated on the next
page), but notice that the
firm’s Net Profit Margin and
ROE both took a major dive in
2008. This is due largely to
factors surrounding the financial crisis. Since then, the
company has recovered
quickly and continues to
approach pre-crisis margins. When we view the Price to Book ratio (P/B), notice that the firm has a current value
of .9 and its 5-year historical high in 2007 was 1.5. This ratio shows that JP Morgan’s book value per share is currently greater than its market price per share. Any values under 1.0 usually imply that the firm is undervalued. The
situation for JP Morgan seems to fit this scenario. At this time, it’s trading below its historical P/B values and also
under a baseline value of 1.0.
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AGR ANALYSIS
Accounting Governance Risk (AGR) is a statistical analysis of accounting and governance risk factors. Lower
scores are indicative of heightened corporate integrity risk, which means that there is an increased likelihood of
negative future events such as class action litigation, material financial restatements, or impaired equity performance. The tables and graphs below present JP Morgan Chase’s AGR as of the end of 3Q11.
AGR
VERY AGRESSIVE
Banks
Industry
SEC Filing
Rating Published
11/4/2011 (10-Q ER)
12/16/2011
Period End
9/30/2011 (3Q11)
Last Audit
PWC LLP.
The graph shown above reflects how JP Morgan’s AGR has varied since 2007 relative to the industry and on an
absolute basis. As of the end of 3Q11, JP Morgan had a very high AGR set at “Very Aggressive. This places the
firm in the second percentile and indicates that their AGR is higher than 98% of all other companies.
RISK
AGR IMPACT
TOP ISSUE
Corporate Governance Events
46.2
Litigation: Class Action
High Risk Events
Revenue Recognition
7.8
34.1
Divestitures
Loan Interest & Fees/Net Loans
Expense Recognition
4.2
Depreciation Expenses/PPE
Asset-Liability Valuation
7.7
Leverage Ratio: Debt/Equity
The table shown above reflects the difference in material risk factors, JP Morgan’s AGR impact rating, and the top
issue associated with each of those factors as of the end of 3Q11. Each “AGR Impact” is subtracted from a perfect
score of 100 (a perfect score would indicate no risk at all). From the table above, it’s obvious that the biggest risks
that the company faces are Corporate Governance Events and Revenue Recognition risks.
DISCOUNTED CASH FLOW ANALYSIS
Overview
Appendix II (p.20) reveals my full discounted cash flow analysis model. My analysis implies that JP Morgan
Chase’s intrinsic equity value per share amounts to $49.64. As of Friday, March 2, 2012, this reveals that the firm
has a 22.2% upside and is significantly undervalued relative to its current market price of $40.63. I utilized a Terminal Discount Rate of 13.5% and a Terminal Free Cash Flow Growth Rate of 3.00%. See below for a discussion on
these measures.
IMPORTANT: Notice that I have used net income as a proxy for free cash flow (FCF). Financial institutions and
intermediaries operations and activities differ from those of normal companies. Thus, they can be difficult to forecast and value via DCF Analysis due to the vastly different nature of their balance sheet’s information and data.
Consequently, certain changes and adjustments must be made such as the one previously stated.
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Terminal Discount Rate—13.5%
Concerning my discount rate, I chose 13.5% for JP Morgan Chase. During lecture, we decided on a measure of
about 10.5% as the appropriate discount rate for the S&P 500. My higher choice than that of the market, reflects
more so economic factors rather than firm-specific factors. JP Morgan Chase itself is unwittingly bound to much of
the same market risks that plague most of the overall financial sector. As discussed earlier, these include regulatory
risks and the FED’s decision to keep interest rates low until around 2013. This warrants a value higher than the
overall market to compensate shareholders for lingering risks plaguing financial firms. Many of my fellow SIM analysts who follow competitors of JP Morgan Chase incorporated higher discount rates in their analysis (such as 14%
and 15%) of their respective firms. I chose a slightly lower required return of 13.5%, which reflects my belief that JP
Morgan is better managed than most of its competitors and well positioned to withstand upcoming regulatory challenges that could be incurred in the coming years.
Terminal Growth Rate—3.00%
I employed a FCF growth rate of 3.00% for JP Morgan. Growth rates in the financial sector as whole have been
extremely dismal this past year. Also, Since JP Morgan Chase is a large market-cap firm that is well established
and has been around for many years, we cannot realistically expect high growth rates comparable to technology
firms such as Apple or LinkedIn. Most of the time, more mature corporations such as JP Morgan Chase can expect
to find a smaller amount high NPV investment opportunities. Consequently, high growth is much harder to maintain.
However, as was the case for my choice of the discount rate, I believe the firms leadership is second to none and
will find ways to maneuver JP Morgan Chase across any future hurdles. Thus, a conservative, but realistically acceptable and nevertheless attractive growth rate of 3.00% is warranted.
Other DCF Assumptions
•
Revenue: When forecasting revenue for years 2014-2021, I assumed a steadily rising growth rate that peaks at
4.00% in 2018 and 2019. I then assumed that this falls into my terminal FCF growth value of 3.00% two years
later in 2021.
•
Income before Taxes: I forecasted Income before Taxes in a similar manner as revenue with % of sales peaking in years 2018 and 2019 at 33.0% and falling to a rate of 32.5% in 2021.
•
Tax Rate: I assumed a constant tax rate of 36.0% for years 2014-2016. Following that, I projected a slightly
higher tax rate of 37.0% for 2017-2021. This is with respect to my predictions of JP Morgan Chase’s higher
future revenues and better future margins. Thus, I believe the company will be taxed at a slightly higher rate
due to its better overall financial condition and performance.
DCF SENSITIVITY ANALYSIS
In Appendix III at the bottom of page 20 is a graph showing a sensitivity analysis for my DCF model that reveals
how implied prices change when one variable input at a time is altered. The variables in this case are Terminal Discount Rate and Terminal FCF Growth Rate. Highlighted in dark red are the most likely combinations of inputs that I
believe are a reasonable measure of the relative risk to JP Morgan Chase and its potential for sustained growth.
We should expect the highest implied equity value per share to occur in the bottom left of the graph where terminal
discount rate is lowest and terminal growth rate is highest. Conversely, the lowest implied values can be found in
the upper right of the graph where the discount rate is highest and growth rate lowest.
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VALUATION ANALYSIS
Multiple Valuation—Absolute Basis
Valuation
High
Low
Median
Current
Target
Multiple
Target E,
S, B,
etc. /
Your Target
Price (F x G)
Weight
A.
B.
C.
D.
E.
F.
G.
H.
I.
P/Forward
22.4
6.4
11.9
8.7
11.0
4.65
51.15
25.0%
P/S
3.3
1.2
2.2
1.6
2.0
24.81
49.62
25.0%
P/B
1.9
.6
1.2
.9
1.1
44.77
44.77
25.0%
P/EBITDA
5.79
1.97
4.14
4.66
4.1
8.72
35.75
0.0%
P/CF
21.4
5.2
8.8
7.2
8.5
5.67
45.36
25.0%
IMPLIED PRICE PER SHARE
$47.73
The table shown above details my analysis of JP Morgan Chase’s intrinsic value by using price multiples (Column
A). Valuation by multiples is relatively straight-forward and simple method of valuing a company. We first analyze
the relevant historical data (Columns B-C) over a set time horizon and then compare the historical medians (Column
D) with the current multiple values (Column E). Note that the data above is for the past 10-years. Next, we set target values for these measures along with targets on a per share basis (Columns F and G). Finally, to achieve our
implied price, we multiply our two targets to get the implied price per share for each valuation multiple (Column H).
The value at the bottom of the table for “Implied Price per share is the simple weighted average of all the valuations.
Equal weights (Column I) are used for each multiple’s target price due to the uncertainty of using the past to predict
the future. However, since we are valuing a bank, we must apply a very small or even zero weight to P/EBITDA.
This multiple can be considered irrelevant because unlike normal companies, interest revenue and interest expense
are primary operating activities of financial institutions. Focusing on a multiple that disregards interest will only skew
what the financial firm is truly worth.
When analyzing the historical high and low values for the firm, two values stand out. These are the 10-year highs
for P/Forward E and P/CF, which are 22.4 and 21.4 respectively. Obviously these can be considered outliers since
they are far above what the 10-year median has been for those respective multiples. Next, we compare the current
multiple values to the median values. Notice that in every category (with the exception of P/EDBITDA) JP Morgan
Chase is trading below its historical median. This strongly suggests that the firm is currently undervalued. When
setting target multiples for each valuation measure, I used conservative targets that are close to the 10-year medians, but slightly under. This reflects my view that economic factors will gradually, but not bullishly, improve. It also
suggests my strong belief that the firm as a whole will be able to whether adverse conditions in the event of a future
economic downturn. Column H lists the implied value for each separate multiple. The bottom cell under Columns H
and I reveals that the implied price per share is $47.73 after calculating the weighted average of our target prices.
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Multiple Valuation—Comparisons to Industry and S&P 500
Relative to
1.8
Relative to
S&P 500
P/Trailing E
10-Year
Median
.79
.98
1.3
1.1
1.5
P/Forward E
P/B
.72
.5
.66
.4
1.0
.9
1.3
1.1
P/S
P/CF
1.5
.9
1.3
.8
10-Year
Current
P/Trailing E
1.1
P/Forward E
P/B
P/S
P/CF
Current
.7
The table shown above compares JP Morgan Chase’s valuation multiples relative to its industry competitors and the
overall S&P 500. When we first look at the valuations relative to direct competitors the industry, it’s evident that the
firm is slightly above its medians and performing better than it has in the past. When these same multiples are
viewed against the market (S&P 500) we can see that JP Morgan is slightly below its 10-year median in every category. Consequently, we can infer that the company is performing better than it has in the past relative to fellow
banks and is undervalued relative to the market.
CONCLUSION
I am recommending a BUY rating for JP Morgan Chase & Co. with a 12-month price target of $49.64. This currently
yields a 22.2% upside from the market value per share of $40.63 on 3/2/2012. My 2012 and 2013 estimates for
EPS and revenue are very close to consensus estimates with only minor deviations from the consensus in both
those years. Valuation through Price Multiplies yielded a very similar per share price of $47.73. Look for JP Morgan to take advantage of the upwardly trending economy. As we have seen throughout this report, the firm is undervalued on a number of valuations and measures. The company boasts a management team that has outshined
other firms and competitors in the financial sector. Through good times and bad times, JP Morgan Chase returns
capital to its shareholders through the repurchasing of stock and consistent dividends. The firm is conservatively
financed and is well positioned to handle any upcoming troubles resulting from bad assets, litigation, economic factors, or regulation.
In 2011, the company reached a new record level of net income and significantly improved EPS in spite of adverse
economic circumstances. JP Morgan Chase continues to invest in the future and is expanding its diverse workforce, building new offices, and breaking into new markets and ventures. The firm selflessly gives back to the community and environment through programs such as The Way Forward and the hiring of numerous veterans now
back home in need of jobs. With all of these combined incentives, we have only just begun to scratch the surface of
the true potential upside that JP Morgan Chase & Co. provides not only to prospective investors, but for the world
as a whole.
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APPENDIX I
Complete Projected Income Statement
JPM
(Millions)
Total net revenue
Consensus
Provision for credit losses
Provision for credit losses-accounting conformity
Noninterest expense
Compensation expense
Occupancy expense
Technology, communications and equipment expense
Professional and outside services
Marketing
Other expense
Amortization of intangibles
Merger costs
Total noninterest expense
Income before income tax expense/(benefit) an d extraordinary gain
Income tax expense/(benefit)
Income from continuing operations
Income from discontinued operations
Income before extraordinary gain
Extraordinary gain
Net income
Per common share data
Basic earnings
Income from continuting operations
Net income
Diluted earnings
Income from continuting operations
Net income
Consensus
Cash dividends declared per common s hare
Book value per s hare
Common shares outstanding
Average: Basic
Diluted
Common shares at period-end
Share price
High
Low
Close
Market capitalization
Financial Ratios
Return on common equity (ROE)
Income from continuing operations
Net income
Return on tangible common equity (ROTCE)
Income from continuing operations
Net income
Return on assets (ROA)
Income from continuing operations
Net income
Overhead ratio
Deposits-to-loans ratio
Tier 1 capital ratio
Total capital ratio
Tier 1 leverage ratio
Tier 1 common capital ratio
Selected balance sheet data (period-end)
Trading assets
Securities
Loans
Total Assets
Deposits
Long-term debt
Common stockholder's equity
Total stockholder's equity
Headcou nt
FY
2013E
100,677
101,000
7,755
-
FY
2012E
98,713
97,200
8,520
-
FY
2011
99,767
FY
2010
104,842
FY
2009
108,647
FY
2008
72,772
FY
2007
74,812
FY
2006
65,113
7,574
-
16,639
-
38,458
-
23,057
1,534
9,244
-
5,480
-
29,037
3,895
4,947
7,482
3,143
13,559
848
62,911
29,282
10,306
18,976
18,976
18,976
28,124
3,681
4,684
6,767
2,446
14,558
936
61,196
27,007
9,637
17,370
17,370
17,370
26,928
3,666
4,624
6,232
1,777
7,594
1,050
481
52,352
17,837
6,185
11,652
11,652
76
11,728
22,746
3,038
4,315
6,053
1,913
3,740
1,263
432
43,500
4,681
982
3,699
3,699
1,906
5,605
22,689
2,608
3,779
5,140
2,070
3,814
1,394
209
41,703
23,865
8,500
15,365
15,365
15,365
21,191
2,335
3,653
4,450
2,209
3,272
1,428
305
38,843
20,790
7,141
13,649
795
14,444
14,444
33,109
11,836
21,273
21,273
21,273
28,706
10,191
18,515
18,515
18,515
5.29
5.29
4.68
4.68
4.50
4.50
3.98
3.98
2.25
2.27
0.81
1.35
4.51
4.51
3.93
4.16
5.27
5.27
5.38
4.65
4.65
4.71
4.48
4.48
3.96
3.96
2.26
2.26
0.81
1.35
4.38
4.38
3.82
4.04
1.00
46.59
0.20
43.04
0.20
39.88
1.52
36.15
1.48
36.59
1.36
33.45
3,900.4
3,920.3
3,772.7
3,956.3
3,976.9
3,910.3
3,862.8
3,879.7
3,942.0
3,501.1
3,521.8
3,732.8
3,403.6
3,445.3
3,367.4
3,470.1
3,516.1
3,461.7
48.36
27.85
33.25
125,442
48.20
35.16
42.42
165,875
47.47
14.96
41.67
164,261
50.63
19.69
31.53
117,695
50.63
19.69
31.53
117,695
49.00
37.88
48.30
167,199
4,018.3
4,038.8
241,600
3,958.9
3,979.1
249,072
11%
10%
10%
6%
6%
2%
4%
13%
13%
12%
13%
15%
15%
15%
10%
10%
4%
6%
22%
22%
24%
24%
0.86
65
156%
12.3
15.4
6.8
10.0
0.85
0.85
60
134%
12.1
15.5
7.0
9.8
0.58
0.58
52
148%
11.1
14.8
6.9
8.8
0.21
0.31
65
135%
10.9
14.8
6.9
7.0
1.06
1.06
58
143%
8.4
12.6
6.0
7.0
1.04
1.10
63
132%
8.7
12.3
6.2
7.3
443,963
364,793
723,720
2,265,792
1,127,806
256,775
175,773
183,573
260,157
489,892
316,336
692,927
2,117,605
930,369
270,653
168,306
176,106
239,831
411,128
360,390
633,458
2,031,989
938,367
266,318
157,213
165,365
222,316
509,983
205,943
744,898
2,175,052
1,009,277
270,683
134,945
166,884
224,961
491,409
85,450
519,374
1,562,147
740,728
199,010
123,221
123,221
180,667
365,738
91,975
483,127
1,351,520
638,788
145,630
115,790
115,790
174,360
19
Equity Research
Student Investment Management Program
Columbus, OH
APPENDIX II
Discounted Cash Flow Analysis
JP Morgan Chase (JPM)
Analyst: Joshua Pladers
Date: 3/2/12
Terminal Discount Rate =
Terminal F CF Growth =
Year
2011E
Revenu e
99,767
% Growth
2012E
98,713
2013E
100,677
-1.06%
Income before T axes
29,282
% of Sales
29.4%
10,306
Taxes
Tax Rate
35.2%
Net Income
18,976
28,706
10,191
32.9%
11,836
35.5%
18,515
Free Cash Flow (Net Income)
18,976
% Growth
18,515
NPV of Cash Flows
NPV of terminal value
Projected Equity Valu e
Free Cash Flow Yield
119,914
74,687
194,601
11.91%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
8.4
10.3
10.9
11.9
Shares Outstanding
32.50%
12,133
35.8%
21,273
36.0%
21,569
14.9%
21,273
-2.4%
3.00%
33,702
33,109
-2.4%
% Growth
103,698
1.99%
29.1%
2014E
1.4%
21,569
14.9%
1.4%
2015E
106,808
3.00%
34,713
32.50%
12,497
36.0%
22,216
3.0%
22,216
3.0%
13.5%
3.00%
2016E
110,547
3.50%
36,204
32.75%
13,033
36.0%
23,171
4.3%
23,171
4.3%
2017E
114,416
3.50%
37,471
32.75%
13,864
37.0%
23,607
1.9%
23,607
1.9%
2018E
118,993
2019E
123,752
4.00%
39,268
14,529
33.00%
15,110
37.0%
24,739
24,739
62%
38%
100%
41,947
32.75%
15,521
37.0%
26,427
4.0%
25,728
4.8%
3.50%
37.0%
25,728
4.8%
128,084
4.00%
40,838
33.00%
2020E
2.7%
26,427
4.0%
2.7%
2021E
131,926
3.00%
42,876
32.50%
15,864
37.0%
27,012
2.2%
27,012
2.2%
Terminal Value 264,974
Free Cash Yield
8.6
10.5
11.1
12.2
7.5
9.1
9.7
10.7
10.19%
Terminal P/E
9.8
Terminal EV/EBITDA
9.7
3,920
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Long-Term Debt
Cash and due from b anks
Cash/share
$
$
40.63
49.64
22.2%
256,775
59,602
15.20
APPENDIX III
SIM
Analyst
Value Per
Share
Highest
Value Per
Share
Terminal Growth Rate
DCF Sensitivity Analysis
1.75%
2.00%
2.25%
2.50%
2.75%
3.00%
3.25%
3.50%
3.75%
4.00%
12.0%
54.64
55.25
55.88
56.56
57.26
58.01
58.80
59.63
60.52
61.46
12.5%
52.00
52.53
53.09
53.67
54.28
54.92
55.60
56.32
57.08
57.88
Terminal Discount Rate
13.0%
13.5%
14.0%
49.60
47.41
45.39
50.06
47.81
45.75
50.55
48.24
46.13
51.06
48.69
46.52
51.59
49.15
46.93
47.36
52.15
49.64
52.74
50.15
47.81
53.36
50.69
48.27
54.01
51.25
48.77
54.70
51.85
49.28
14.5%
43.54
43.86
44.19
44.54
44.90
45.27
45.67
46.08
46.51
46.96
15.0%
41.83
42.11
42.41
42.71
43.03
43.37
43.71
44.08
44.45
44.85
Lowest
Value Per
Share
20
Equity Research
Student Investment Management Program
Columbus, OH
APPENDIX IV
Sources
•
http://banking.about.com
•
http://yahoo.finance.com
•
http://www.investopedia.com
•
http://finapps.forbes.com
•
http://investing.businessweek.com
•
http://jpmmorganchase.com
•
http://www.reuters.com
•
JPM Morgan Chase 2010 Annual Report
•
JPM Morgan Chase Fourth-Quarter Earnings Release
•
Thompson Reuters Baseline
21