JPMorgan: Cautionary Risk Despite Strong Earnings
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JPMorgan (NYSE: JPM) is still an investment with cautionary risk attached. The damage from the CIO was worse than originally stated, but not as bad as analysts' dire estimations. JPMorgan did have a Q2 earnings release with some positive reports, but there are still warranted misgivings about the internal controls at the firm. There are also larger headwinds at play, the looming LIBOR investigations, as well as the exposure to the weak economy in Europe. It's not difficult for investors to find an alternative investment in the industry with greater potential for capital appreciation at a comparable price and less risk in the near-term future.
JPMorgan's current price is around 8.39 times earnings. This is a slight increase from its trailing 12 months price of around 8.12 times earnings. Sales growth decreased by over 17 percent from the previous year and by almost 17 percent from the previous quarter. JPMorgan's price to book ratio is around 0.76, while its price to sales ratio is close to 1.46. The price to cash flow ratio is around 5.69. JPMorgan's return on equity has been close to 11 percent for the past three quarters. Operating margin was stable around 19 percent from 4Q11 through 1Q12. During the same time period, JPMorgan's net margin increased by around 250 basis points to over 26.6 percent, while its debt to equity ratio decreased by around two percent, down to 1.56. JPMorgan's beta is currently around 1.32, while its PEG ratio is close to 1.4.
JPMorgan's dividend yield has been around 3.33 percent for the past three quarters, which equates to an annual rate of around $1.20. This yield is around 80 basis points higher than the industry average. JPMorgan's growth rate this year is at a deficit and significantly below the industry average. For the past five years, JPMorgan's growth rate has been positive, while the industry was at a deficit. Its projected growth rate for next year is almost double the industry average, while its projected growth rate for the next five years is around 60 percent of the industry average. JPMorgan's trailing price to earnings ratio is lower than the industry average of around 11.16, and its price to book ratio for the most recent quarter is around 80 percent the industry average. Its price to cash flow ratio for the most recent fiscal year is close to 60 percent the industry average, and its net profit margin for the trailing 12 months is around 19 percent.
In the 2Q12 earnings release, JPMorgan highlighted a number of promising figures. Overall there was an improvement in client-driven businesses and consumer credit, as well. Mortgage originations increased by 29 percent Y/Y and by 14 percent from the previous quarter. JPMorgan's credit card sales volume increased by around 12 percent year on year. The number of checking accounts was around 27.4 million; this is an increase of 4 percent year on year and one percent from the previous quarter. Commercial banking increased by 16 percent, the 8th consecutive quarter of loan growth. JPMorgan provided almost $10 billion in credit to U.S small businesses; this is an increase of 35 percent for the first six months year on year. Net income in Q2 2012 was almost $5 billion, revenue was around $22.8 billion; this is a decrease of nine percent and 16 percent Y/Y, respectively. The CIO reported a loss for the quarter that amounted to $4.4 billion.
The earnings release highlighted the key facts as to why this was an isolated incident that would be likely to never happen again. In short, the CIO synthetic credit group will be shut down and remaining activities will be moved to the Investment Banking division. These types of risk activities will be heavily reduced and an extensive review process led to significant progress in Q2. On the earnings call, Dimon went into greater detail, as did TSS CEO Michael J. Cavanagh. It all really boils down to a lack of internal control and governance. JPMorgan recently had to amend and restate its Q1 2012 earnings statement as a result of the CIO fiasco and inept management thereafter. This issue may be fixed looking forward, but it does raise warranted questions about what the multinational investigations will unearth about JPMorgan's potential engagements in the past relating to LIBOR manipulations.
Even in the recent earnings release, there are questions some have about how JPMorgan allocated and designated funds in order to define its current EPS. The questions about JPMorgan's management in the recent past and looking forward will most likely remain in the market until the LIBOR facts come to fruition. Along with Citigroup (NYSE: C), JPMorgan is the most exposed American bank to European economies. As long as countries like Spain, Greece and Italy continue to struggle and receive downgrades, it's questionable as to how well these banks can do in the market. There are more stable choices in the industry that haven't dealt with the litigation, poor publicity, or over-exposure in Europe.
Right now, Wells Fargo (NYSE: WFC) is one of the best investment choices in the industry. Wells Fargo recently settled a fine with the U.S Department of Justice regarding its mortgage practices, but on the aggregate, it has avoided bad publicity and over-exposure to suffering emerging markets or risky derivatives. Bank of America (NYSE: BAC) is an attractive choice in the banking industry because it's available at such a significant discount in comparison to its peers. Shareholders will benefit from Bank of America's substantial capital appreciation once its stock price catches up to the other big banks. UBS (NYSE: UBS) is also less exposed to suffering economies abroad, but the company is dealing with bad publicity from the LIBOR scandal with the potential for further fallout once the investigations conclude. UBS had been suspended from trading involving LIBOR and TIBOR for one week last December. Citigroup is also available at a discount, due to poor publicity from the Moody's downgrade and exposure in Spain. Citigroup has improved significantly and lacks the issues JPMorgan has with corporate governance and risky investments in the recent past. All of the major banks have their minor issues, but any would be a more favorable investment than JPMorgan at this point in time.
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