Is JPMorgan Still Undervalued?

With shares of JPMorgan Chase & Co. (NYSE:JPM) trading at around $53.40, is JPM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The Financial sector is in an interesting position right now. On the positive side, home prices have been increasing, loan defaults have been decreasing, the stock market has consistently moved higher, interest rates are finally moving higher, monetary stimulus is now on a global level, and cost-cutting has led to increased profitability. However, while some of these are real positives, we should take a closer look at some others.

Are home prices increasing due to speculation? Much of the recent real estate boom has been in thanks to invest firms looking to make profits, not families going out and buying new homes because their pocketbooks are fat and they can afford an upgrade. The stock market is an important factor because financials almost always move with the market. The big question here is when (or if) Bernake will begin to taper. It could be later this year, but that’s not likely. It’s more likely that Bernake put that possibility out there to see how markets would react. With unemployment ticking up, it’s less likely that he will move. This is good news for the stock market, but it also indicates that the economy is weaker than had been anticipated by many. Yes, it’s an interesting and wacky world we live in at the moment. As far as cost-cutting goes, this is good for bottom lines, but considering much of this cost-cutting comes in the way of layoffs, this isn’t going to boost consumer spending. This trend is taking place in many industries.

Looking closer at the interest rate situation, the cost of mortgages are increasing, and there has been a recent decline in refinancing old loans. On the other hand, mortgage applications are still on the rise. The big question here is whether or not interest rates and the economy can grow at the same time. Many economists are predicting this to be a possibility. That seems to be overly ambitious. In addition to domestic dilemmas, rising interest rates will lead to increased borrowing costs for other counties, which are currently dealing with massive debt burdens. The good news for those investing in the stock market is that interest rates have the potential to come back down. (Note: This isn’t to say interest rates should remain at record lows. This is what caused many problems in the first place.)

Other negatives include Europe as well as domestic regulations. For JPMorgan, an added negative has been the London Whale debacle, which never seems to go away. CEO Jamie Dimon recently had an interesting quote regarding this issue: “We did what was the right thing to do. No hiding, no lying, no bullshit. Period!” He then went on to apologize for the trade that lost more than $6 billion – again.

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Speaking of Jamie Dimon, some investors love him and some don’t. Those who happen to be unsure might want to know what 2,410 JPMorgan employees think of him. According to Glassdoor.com, 86 percent of employees approve of Jamie Dimon. This is a high number, and it shows that employees trust their leader. As far as company culture, employees have rated their employer a 3.3 of 5, and 64 percent of employees would recommend the company to a friend.

JPMorgan is currently trading at just 10 times earnings whereas Bank of America (NYSE:BAC) is trading at 41 times earnings, and Citigroup (NYSE:C) is trading at 18 times earnings. Profit margin is a great measure of efficiency. JPMorgan has a profit margin of 24.90 percent whereas Bank of America has a profit margin of 6.43 percent, and Citigroup has a profit margin of 13.81 percent. JPMorgan’s profit margin has steadily improved since 2009, and it should continue to grow. So far, it looks as though JPMorgan is the best investment.

To further the strengthen the bull case for JPMorgan when being compared to peers, it currently yields 2.80 percent whereas Bank of America yields 0.30 percent, and Citigroup yields 0.10 percent. Bank of America and Citigroup would offer a higher yield if they felt comfortable doing so. In other words, it’s a good sign that JPMorgan is comfortable offering a 2.80 percent yield.

JPMorgan has seen a decline in revenue over the past three years, but the company’s focus is the bottom line. Earnings have consistently improved on an annual basis. Financial sector earnings are also expected to improve in Q2.

Let’s take a look at some important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Despite all the drama, JPMorgan has been on a tear over the past year.

1 Month Year-To-Date 1 Year 3 Year
JPM 9.77% 23.84% 68.53% 50.81%
BAC 0.92% 13.28% 81.06% -14.73%
C 2.71% 26.62% 89.29% 29.38%

At $53.40, JPMorgan is trading above its averages.

50-Day SMA 51.38
200-Day SMA 47.86

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for JPMorgan is stronger than the industry average of 2.10.

Debt-To-Equity Cash Long-Term Debt
JPM 1.58 954.87B 725.60B
BAC 1.36 502.26B 617.76B
C 1.46 754.95B 560.08B

E = Earnings Have Been Strong

Earnings have consistently improved on an annual basis.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 101,491 115,632 115,475 110,838 108,184
Diluted EPS ($) 1.37 2.26 3.96 4.48 5.20

Looking at the last quarter on a year-over-year basis, revenue declined, but earnings improved.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 26,712 22,180 25,146 23,653 25,122
Diluted EPS ($) 1.31 1.21 1.40 1.39 1.59

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

JPMorgan has weathered many storms throughout its history. It has always managed to survive and then thrive. With the right leadership in place, a focus on consistently improving the bottom line, strong margins, and a superb valuation, JPMorgan is an OUTPERFORM.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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