Can JPMorgan Continue Its Impressive Rally?

JPMorgan has risen from the financial crisis as arguably the strongest megabank. Under the leadership of polarizing CEO Jamie Dimon, the company emerged from the financial crisis far less damaged than its peers. Although the bank has regained stability in the aftermath of the crisis, events like the “London Whale” trading debacle call into question whether the bank has completely eliminated risky banking practices from its operations. Let’s use our CHEAT SHEET investing framework to decide whether JPMorgan is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

JPMorgan’s stock has climbed significantly in the past year — its uptrend mostly fueled by renewed confidence in the economy and three straight quarters of year-over-year earnings growth. JPMorgan is expected to announce its pivotal second quarter earnings this Friday. These results will most likely make or break JPMorgan’s yearlong uptrend.

A strong equities market, including a rebirth of IPOs this year, will bolster profits in JPMorgan’s investment banking division, which makes up around 30 percent of its revenues. Mortgage originations, which increased 57 percent year-over-year last quarter, should stay healthy for at least the next two quarters, as new home sales continue to rise. Even with the new Dodd-Frank regulations and the one year anniversary of the “London Fiasco” incident, JPMorgan should be able to exceed analysts’ estimates because of a more attractive equities and real estate market, in addition to its success in reducing expenses over the past few quarters.

E = Earnings Are Increasing Year-over-Year 

JPMorgan has demonstrated strong year-over-year earnings growth in the last several quarters. The bank’s earnings growth in the last three quarters has been impressive given that economic uncertainty from the financial crisis still lingers. Revenue growth has been mixed — mostly due to perpetually low interest rates that weaken the bank’s ability to make money on lending operations. Interest rates, however, only have one way to move, and that’s up. Expect both revenue growth and EPS growth to become more stable as JPMorgan’s net interest margin increases as interest rates rise in the future.

2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1
EPS Growth YoY 33.61% 54.89% 37.25% -4.72% -7.03%
Rev. Growth YoY -3.57% 10.16% 5.82% -17.17% 3.29%

*Data sourced from YCharts

E = Excellent Performance Relative to Its Peers

When comparing forward price to earnings, return on equity, and dividend yield, JPMorgan is the clear frontrunner of the megabanks which include: Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and Goldman Sachs (NYSE:GS). It has the lowest forward price to earnings multiple of the five, meaning that investors are paying less for a piece of its future earnings relative to the other banks.

Additionally, JPMorgan has the second highest return on equity of the group, a testament to strong management and the bank’s ability to generate revenue internally.

Lastly, JPMorgan’s dividend yield is the second highest of the group at 2.8 percent—very attractive relative to the industry . The bank has increased its dividends twice since the financial crisis, and at a payout ratio of 21 percent, the company has room to increase its dividend further in the future.

JPM C BAC WFC GS
Forward P/E 9.13 9.16 10.19 10.88 10.13
ROE 11.55% 4.65% 2.14% 13.07% 10.12%
Dividend Yield 2.80% 0.10% 0.30% 2.90% 1.30%

T = Technicals Are Strong

JPMorgan has been on a tear in the past year—up a whopping 59.71%. The stock currently trades at around $54.40, above both its 200-day moving average of $49.36 and its 50-day moving average of $53.45. After hitting a 52-week high of $55.90 at the end of May, the stock retraced back down to $50.92; however, it looks like the company’s stock has regained some upward momentum heading into its second quarter earnings announcement.

Conclusion

JPMorgan is currently the cheapest megabank stock to own, has an attractive dividend at 2.8%, and has posted three consecutive quarters of strong earnings growth. Additionally, the bank currently has a Basel III Tier 1 ratio of 8.9 percent. This ratio examines the bank’s core holdings to its risk-weighted assets. Because JPMorgan’s Tier 1 is very strong at 8.9 percent, its balance sheet appears healthy enough to limit any major downside risks, barring anymore rogue-trading fiascos. The only real downside risk would be the departure of Jamie Dimon — an event that is not likely in the next several years. Look for JPMorgan to meet analysts’ expectations on Friday and continue to perform well throughout the year. JPMorgan is an OUTPERFORM.

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