JPMorgan will Rebound like Wal-Mart
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even the great ones stumble.
Ali lost to Leon Spinks. The second season of "Flavor of Luv" was a mere shell of the first. Warren Buffett lost heavily investing in US Airways. But the great ones always recover. That is a sign of greatness, whether it is in a company or an individual.
Wal-mart fell earlier this year down into the $50s due to allegations that it bribed Mexican officials. Helping Wal-Mart recover was buying by Buffett. Warren Buffett bought 7,671,000 shares of Wal-Mart at an average price of $61 earlier in 2012. Wal-Mart is now trading around $73.18 a share, fully recovered.
JPMorgan has fallen due to trading losses, the "London Whale" blunder, that will cost it billions. The final tally is uncertain, although estimates are as high as $9 billion. Now around $35 a share, JPMorgan is down from its 52-week high of $45, reached in mid-March. About $20 billion in market capitalization has been lost.
There is every reason to believe that JPMorgan, like Wal-Mart, will rebound, and to invest accordingly.
JPMorgan currently trades at only $35 a share with a forward price-to-earnings multiple of just 6.53. That is far too low for a sector leader with a robust balance sheet. For value investing, the price-to-book ratio for JPMorgan is only 0.69.
Like Wal-Mart, JPMorgan enjoys a wide competitive moat. It was one of the few banks to emerge from The Great Recession in an augmented position. At 19.48%, the profit margin is very healthy. Earnings-per-share growth is higher by more than 13% this year. For the next year, earnings-per-share growth is expected to increase by another 21.94%.
The dividend income stream of JPMorgan also makes the wait for a full recovery more tolerable. When the share price of a stock falls, the dividend yield rises. At present, the dividend income stream provided by JPMorgan is 3.43%. The average for a member of the Standard & Poor's 500 Index is around 2%; with the historic dividend payout ratio being about 50%.
The dividend payout ratio for JPMorgan is only 24.56%, leaving ample cash flow to increase the dividend or initiate a stock buyback program to reward its shareholders. An above average dividend yield coupled with a below average dividend payout ratio is a reflection of sound financial management for a publicly traded entity that respects the rights of minority shareholders. For individual investors, that is imperative.
Having Jamie Dimon as the Chief Executive Officer is another huge asset of JPMorgan. Yes, his reputation is tarnished at the moment, but Buffett did not look so great during the bullish days of the dot.com boom, either. Jamie Dimon understands how to work Washington, which is invaluable for a banker. There is no member of Wall Street more adroit at dealing with both ends of The Mall in the District of Columbia. That is a huge asset for JPMorgan; and it reveals how savvy Jamie Dimon is at maximizing the influence of the bank. It is a significant competitive advantage over other financial institutions, to say the least.
Down 19.64% for the quarter, JPMorgan is up 2.16% over the last week of market action. In results posted for the second quarter last week, JPMorgan reported a profit of almost $5 billion. The mean analyst target price for JPMorgan over the next year is $44.84. Institutional ownership is high at over 74% and the short float is low at 1.22%, both very bullish indicators. On June 13, Oppenheimer reiterated its "Outperform" rating for JPMorgan with a target price of $56. The recovery appears to be just starting, so the bulk of the profits are still ahead for JPMorgan.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.