JPMorgan Still Earning Respect but the Stock Remains Undervalued
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Money center titan JPMorgan (NYSE: JPM) once enjoyed a solid reputation among investors – particularly for how it managed the credit crisis. Today, two quarters removed from the embarrassment suffered as a result of its "London Whale" trading loss, the bank is still trying to regain some of that lost respect. While, the stock does look cheap by many standards, going into the bank’s third quarter earnings report, investors were eager for signs that the worst was over. JPMorgan did its best to oblige.
The Quarter that Was
For the third quarter, JPMorgan earned $1.40 per share on revenues of $25.9 billion. The bank exceeded both top and bottom line estimates, which were at $1.21 EPS and $24.5 billion in revenue – beating by 6% and 16%, respectively. Its revenue of $25.9 billion was not only 13% better than the second quarter, but 6% better year over year.
Equally impressive was that net income surged to $5.7 billion – 15% better than the previous quarter and an improvement of 34% from the same period of a year ago. This performance exceeded that of rival Citigroup (NYSE: C); although it beat top and bottom line estimates, its $19.4 billion in revenue during its third quarter declined year over year by 7%. Likewise, Wells Fargo (NYSE: WFC) reported revenue of $21.2 billion, which arrived short of analysts’ expectations of $21.47 billion.
So in many respects, JPMorgan is outperforming its competition by a pretty respectable margin. Chairman and CEO Jamie Dimon said, “These results reflected continued momentum in all our businesses.” It is hard to disagree with that statement. Overall, this was one of the best performances by any bank this year.
Management deserves a lot of credit for producing such solid numbers despite the bank’s slowdown in net interest income (NII), which fell 2% from the previous quarter. That it was able to generate EPS growth of 15% above the previous quarter despite a drop of 9 basis points (to 2.92%) in its net interest margin (NIM) was pretty telling.
The bank was helped by growing fees, which increased almost 30%. Likewise record-low interest rates have contributed to a modest recovery in the housing market, which has helped JPMorgan with a better than expected performance in its mortgage business. In that regard, where mortgage originations were up 8%, the bank is outperforming rivals such as Citigroup and appears to be in a neck and neck race with Wells Fargo, which just recently reported $10 billion in first mortgages.
Also notable during the quarter was JPMorgan’s performance in its core banking segment as well as commercial lending. The bank saw growth of 1% in both checking accounts and average deposits when compared to the previous quarter. In the “not-so-good” part of the report, JPMorgan experienced weakness in its retail channel, which shed 2%. Likewise, the bank continues to struggle to keep loan balances up, as it appears consumers have begun to spend less.
Considering how the dominant story surrounding JPMorgan was the embarrassment suffered as a result of the “London Whale” event, the company deserves a considerable amount of credit for having acted quickly to mitigate the damage. As evidenced by this recent performance, it appears (for the moment) that the worst is over.
Nonetheless, there are yet fixable areas in its operation. For example, investors want to see that JPMorgan continues to improve in areas such as its NII and NIM, which showed signs of deterioration. Likewise, the bank continues to struggle with faster mortgage prepays. But overall, this was an impressive performance, which generated cause for optimism.
Another welcomed sign is that following the London Whale situation, JPMorgan has now put together two consecutive solid quarters. It is clear that the company seems intent on repairing the damage and regaining investors’ confidence.
To that end, over the past couple of months, Jamie Dimon and his wife have purchased over $17 million worth of the company’s stock. Whether or not this was a public relations move, as some were quick to point out, the acquisition also proved very profitable, as the stock has surged 26% since their purchase.
There is a lot to like with JPMorgan. Despite a very tumultuous year, the bank is performing as well as (if not better than) expectations. Also, though JPMorgan might trade at a slight premium when compared to other banks, its current valuation is attractive on the basis of the quality of its management as well as having a business that has stabilized and is poised for sustained growth over the long term.
What’s more, with the possibility of share buybacks over the next several quarters and an improving balance sheet, 20% upside in the stock should not be out of the question during that span. As a result, fair value could easily approach $52 to $55 sometime in 2013, which makes this stock an excellent buy.
rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. 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.