JPMorgan: Has the Powerhouse Stock Hit Bottom?
There are many viewpoints regarding Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE/JPM), some of which have gone south since the situation regarding their multi-billion-dollar loss was announced, related to European credit trades. The real issue for investors should not be a moral one, since no rules were broken, but rather the analysis of the firm in relation to other bank stocks. Where does JPMorgan Chase fit in relation to other bank stocks, and what does the future hold for its corporate profits?
The latest quarterly report on corporate profits places a big spotlight on the fact that JPMorgan is a hugely profitable firm, a giant amongst the bank stocks. While the market sector has experienced volatility, JPMorgan is so profitable that it appears able to weather the storm.
For the latest quarter, the firm took a $4.4-billion loss for the trading losses of its London-based risk department. For many firms that would be a massive hit. For JPMorgan, it translates into a decrease in corporate profits of only 8.7% to just under $5.0 billion, compared to $5.4 billion the previous year. These corporate profits come from revenue of $22.2 billion.
For all of the concerns regarding JPMorgan and other bank stocks regarding some of the questionable trading, it amounted to a tiny slice in the corporate profits for the firm. This speaks volumes to the potential for massive corporate profits over the long term.
But, I would not necessarily jump in yet. Bank stocks could get hit this fall, as the European mess continues to evolve. This unraveling of a continent could cause massive upheaval for the financial market sector and their corporate profits. Even with JPMorgan being the giant money-machine that it is, unforeseen events could cause additional strain.
A bigger concern for me is the decline in revenue. I would want to see a stabilization and growth in the revenue figures. The lower volume in the capital markets is hurting that market sector, but the consumer and business banking is doing extremely well. Business loan origination is up 14.0%, mortgage origination up 29.0%, credit card sales up 12.0%, loan growth in commercial banking up 16.0%, and the firm reported the 13th consecutive quarter of asset management flows. Once the capital markets gain some semblance of stabilization, then the firm will be firing on all cylinders.
When it comes to bank stocks, Jamie Dimon has had a sterling reputation of delivering positive results for his shareholders throughout his career before this latest event. With this trading loss taking place under his watch, look for Dimon to ensure this doesn’t happen again. He has superbly guided the markets by talking up a possible loss of almost $10.0 billion, which he then over-delivered by having the write-down come in at just $4.4 billion. Since then, he has cleared house, eliminating the top architects of this department.
Three main questions remain: 1) What will happen to Europe, as JPMorgan still has some exposure there?; 2) When will the capital markets regain volume and the “risk on” trade is back in vogue?; 3) By shutting down a previously profitable division, what will be the future growth levels in JPMorgan’s corporate profits?
With a profit margin of 21.0%, there is no question that this is a hugely profitable firm among bank stocks. Trading at a 30.0% discount to book value, as many other bank stocks are also trading at a discount, investors are already incorporating some adverse possibilities. The question: is 30.0% enough of a cushion against an unforeseen event? I would suggest holding off until we get greater clarity from Europe, especially going into the fall. Even with a great forward dividend yield of 3.5%, bank stocks could go through another round of selling.
Chart courtesy of www.StockCharts.com