JPMorgan Remains The Best Universal Bank Franchise: UBS

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JPMorgan Remains The Best Universal Bank Franchise: UBS
Joe Mabel [CC BY-SA 3.0], via Wikimedia Commons

JPMorgan Chase & Co (NYSE:JPM) is facing billions in fines and darkening investor sentiment, but before the malfeasance came to light it was seen as the strongest bank coming out of the great recession, and according to UBS analysts Derek De Vries and Brennan Hawken it still is.

JPMorgan Remains The Best Universal Bank Franchise: UBS

JPMorgan’s tangible book value

“Since 2006 JPMorgan Chase & Co (NYSE:JPM) has grown its tangible book value per share at a 12 percent CAGR and it is the only U.S. money center bank paying a significant dividend,” they write. “We expect JP Morgan to continue to earn a mid-teens return on tangible book value and believe the market underestimates JPMorgan Chase’s gearing to global GDP growth.”

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De Vries and Hawken aren’t discounting the regulatory problems that JPMorgan Chase & Co (NYSE:JPM) is having; their model allows for up to $30 billion in total litigation costs before taxes, but they still see plenty of upside. At $51.72, the stock is trading around 8.5x earnings, well below its ten year average of 10x earnings, and at just 1.3x its tangible book value. De Vries and Hawken also say that a sum-of-parts valuation puts the fair price at $62, about 15 percent higher than consensus.

JPMorgan trading below its historical price

“With JPMorgan Chase & Co (NYSE:JPM) trading more than one standard deviation below its historical price to tangible book value and three quarters of a standard deviation below historical average on price to earnings, we don’t think valuation is a reason to avoid owning JP Morgan,” they write.

JPM valuation historical context

JPMorgan undergoing investigations

JPMorgan Chase & Co (NYSE:JPM) is currently under investigation from multiple Federal agencies, state governments, and foreign governments, so investing in them now is certainly complicated. However, De Vries and Hawken think that buyers are avoiding the stock out of frustration more than anything (and that consultants are recommending it so that they don’t have to answer difficult questions). “For those with a medium term investment horizon, we think regulatory concern will be lower, not higher, in 12 months’ time,” they write.

If that’s true, now is a particularly good time to buy JPMorgan Chase & Co (NYSE:JPM), precisely because it is getting so much bad press. Once people have had time to reassess the situation, other value investors may have already moved in on the deal, pushing the price closer to the $62 mark that UBS AG (NYSE:UBS) thinks it should be at.

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