It would be an interesting year to be a fly on the wall at the executive retreat for CEO Jamie Dimon and his team at JPMorgan Chase & Co. (JPM.N). It’s hard to imagine what else could be thrown at the bank as it tries to deal with aggressive regulators (and fines) on both sides of the Atlantic, continued brand and monetary impact from the London Whale trading losses and the broader changes in the banking environment in the new post-Lehman world.
Let’s see where JPM stands today, then look past the sensationalist headlines.
Despite its troubles, JPM has performed in line with the S&P over the last six months though there is some underperformance relative to the Dow Jones Banking Index, as seen in the chart below.
So what’s in the price? No doubt JPM is a well-run company and Jamie Dimon’s leadership through the crisis remains well respected. Equally, the market consensus is that “the Whale” was an aberration and JPM operates a robust risk-management infrastructure. So let’s see what the market is saying through the current stock price and valuation.
JPM appears inexpensive using the StarMine Intrinsic Valuation model, with the model valuing JPM at almost $89. JPM is also only trading at a P/E of only 8.3 versus 10.4 for its peer group, as seen in the chart below.
Why the discount? Firstly, all the U.S. banking stocks are trading well below their fair value, with the industry median being 0.77 â€“ so while the banks are cheap due to the structural reduction in their ROE and leverage, JPM appears to be attractive even against the other banks.
Secondly, JPM has specific regulatory and legal challenges with the London Whale, its pre-crisis MBS issuance and the investigation into the hiring of Chinese “princelings” in China and Hong Kong, to name but a few.
Markets hate nothing more than uncertainty and JPM is being priced at a modest discount until there’s greater clarity on whether the company’s litigation reserve balance is sufficient for the various fines that are currently under negotiation.
Credit markets don’t see the problem
One last market signal that’s worth considering is the credit default market. Note in the chart below that the market has barely raised an eyebrow at recent events â€“ 2013 volatility has been notable for its absence, certainly nothing like the levels seen since 2008.
With some justification, market participants often note the more alert nature of the fixed income market â€“ bond yields have often inverted before the equity markets even finish serving the champagne. Here, the reverse is true. Perhaps the absence of concern should be the interesting signal for the equity investor.
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