JPMorgan Chase Investor Day: Rising To The Challenge

JPMorgan Chase Investor Day: Rising To The Challenge
Joe Mabel [CC BY-SA 3.0], via Wikimedia Commons

Sterne Agee analysts Todd L. Hagerman and Robert Greene rate JPMorgan Chase & Co. (NYSE:JPM) as a Buy as the long-term outlook for underlying business units remains favorable under challenging circumstances.

The long-term outlook for JPMorgan Chase & Co. (NYSE:JPM)’s underlying business units remains favorable under challenging circumstances. That said, low rates, elevated regulatory costs and expectations for normalizing mortgage/fixed income revenues will challenge pre-provision profits. However, benign credit measures, enhanced efficiencies as well as moderating pressure tied to JPMorgan’s regulatory and control headaches should help jump-start the firm’s pedestrian multiple in the quarters ahead.

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JPMorgan’s business model offers a fair amount of earnings leverage

A transition year, but JPMorgan Chase & Co. (NYSE:JPM)’s diversified business model offers a fair amount of earnings leverage heading into ’15 in our view. To be sure, investors remain focused on the rather weak outlook for mortgage banking, underwhelming capital return and normalizing fixed income, including expectations for particularly weak capital markets in 1Q14. While mortgage banking will continue to normalize and fixed income will likely remain relatively flat over the next couple of years, the potential offsets include steady commercial/consumer loan pipelines, positive spread benefit with the back-up in rates, and relatively benign credit quality measures. And while elevated regulatory/control costs, together with waning credit leverage into ’14/’15, may give investors pause, our sense is much of the risk is largely discounted in the stock at this stage—particularly expectations for rather weak client activity in 1Q14.

At this stage, our sense is that it remains difficult for investors to ignore JPMorgan Chase & Co. (NYSE:JPM)’s pedestrian earnings multiple against its consistently strong underlying profitability and internal capital formation. Notably (ex. special items/DVA/FVA) JPMorgan posted a healthy ROTCE of 15% in ’13, including 17% in the corporate & investment bank, and targets a ~15-16% ROTCE through the cycle under Basel III. Moreover, JPMorgan’s capital footing (10%+ Tier 1 Common target for ’14) remains intact, including >$10B in excess capital after dividends—pretty respectable given JPM’s risk profile and operating environment.

JPMorgan’s valuation

Our 2014 and 2015 estimates stand at $5.90 and $6.30, respectively. Our 1Q14 estimate is $1.36 vs. current consensus of $1.48. Although the operating challenges facing JPMorgan Chase & Co. (NYSE:JPM) will likely persist longer than initially feared, including elevated compliance/risk management costs and lackluster capital return in ’14, the company’s core fundamentals and commanding market share leave us optimistic about JPMorgan’s core earnings trajectory and pedestrian multiple. With the shares trading at a meaningful discount to peers, we continue to find the risk/reward favorable for investors. Our 12-month price target remains $65, which implies about 11x our 2014 estimate of $5.90 and 1.5x our estimated ’14 tangible book value.

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