After Earnings, this Bank Stock could be a Steal at the Current Price

Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Most analysts agree that financial stocks, and especially banks, will perform well this earnings season. In fact, with the exception of perhaps Bank of America (NYSE: BAC), most of them have fared quite well. Some have been especially good, like Goldman Sachs (NYSE: GS), which has blown it out of the park ($5.60 EPS versus the analyst consensus of $3.66 EPS). No wonder shares of Goldman have jumped more than 6% after the earnings report.  And, at a P/E of 10.23x, the stock is still far from unattractive.

There has been, however, another bank that has a good earnings report out, but it has been overlooked by the market: JP Morgan (NYSE: JPM). On Jan. 21 the American bank reported net income of $5.7 billion (up from $3.7 billion last year), and EPS of $1.39, up from last year's $0.90, beating the analyst estimates of $1.16 (that's roughly a 20% beat). The stock, however, barely moved on the days that followed the report, which could signal that the market has overlooked this one.

But is the market wrong? How does JP Morgan's stock look like?

  • It trades at 8.93x earnings, which is a very low valuation, even for financial stocks. Forward P/E is even lower (at only 8.09x). From a valuation perspective, the stock is very cheap.

  • It currently has an average target price of $51.29. That implies an upside potential of more than 10%.

  • The bank has posted record profits three years in a row.

  • They have successfully returned to safer business areas (such as mortgages and deposits), and yet are still a strong player in investment banking.

  • When compared to its main competitors, JPM has an edge:

<table> <tbody> <tr> <td><strong>Stock</strong></td> <td><strong>P/E</strong></td> <td><strong>Forward P/E</strong></td> <td><strong>Average Price Target</strong></td> <td><strong>Implied Upside from Avg PT</strong></td> <td><strong>Dividend Yield</strong></td> </tr> <tr> <td>JP Morgan</td> <td>8.92</td> <td>8.09</td> <td>$51.29</td> <td>10.51%</td> <td>2.59%</td> </tr> <tr> <td>Bank of America</td> <td>44.56</td> <td>8.70</td> <td>$12</td> <td>5.72%</td> <td>0.36%</td> </tr> <tr> <td>Goldman Sachs </td> <td>10.20</td> <td>9.78</td> <td>$143.48</td> <td>-1.24%</td> <td>1.38%</td> </tr> <tr> <td>Wells Fargo</td> <td>10.40</td> <td>8.98</td> <td>$38.91</td> <td>11%</td> <td>2.52%</td> </tr> <tr> <td><strong><span><em></em></span></strong><em><strong><span>Edge</span></strong></em></td> <td><strong><span><em>JPM</em></span></strong></td> <td><strong><span><em>JPM</em></span></strong></td> <td><strong><span><em>-</em></span></strong></td> <td><strong><span><em>WFC</em></span></strong></td> <td><strong><span><em>JPM</em></span></strong></td> </tr> </tbody> </table>

As one can see in the above table, JPM is more attractive than its main competitors in all areas except "Implied Upside from Average Price Target," where Wells Fargo's implied upside is very slightly above JP Morgan's. With the exception of Bank of America's current P/E, all stocks seem cheap, but JP Morgan is by far the cheapest of the lot.

What are insiders doing?

There seems to be some positive insider movement as well. On Jan. 29, JP Morgan Director Patrick Flynn bought 6,750 shares of the company, at $46.93 each, for a total value of roughly $320,000. This insider purchase might be a sign that company officials believe the stock is poised to outperform. However, just two days after on Jan 31, Managing Director Mary Erdoes sold 15,000 shares, so the insider picture is not as clear. No insider buying has been recorded in any of JPM's main competitors in January, and yet there has been some insider selling this year going on at Goldman Sachs and Wells Fargo. At any rate, insider selling, unlike insider buying, is not as strong an indicator of how company officials see the their stock, so do not base an investing decision on this information alone.

Bottom Line

The market has not reacted to JP Morgan's good earnings report. The bank has room to grow, trades at very low valuations, has an above-average dividend yield, and shows more than a 10% in implied upside when taking into account the analysts' target price average. If an investor wants to go long on an American bank stock this year, I would definitely keep JPM in mind. With the economy recovering, and a strong bullish market forming, this stock will probably not be this cheap for too long.


wheckster has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Bank of America and 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus