Date:_10/9/2012 Analyst Name: Scott R. Mertens CIF Stock Recommendation Report (Fall 2012) Company Name and Ticker:_JPMorgan Chase_(JPM) Section (A) Summary Recommendation Buy: Yes Target Price: $49.24 Sector: Financial Services Current Price: $41.38 Morningstar (MS) Fair Value Est.: $51.00 EPS (TTM): 4.32 Next Fiscal Yr. End Year : 2012 Month : December Forward P/E: 7.90 Industry: Diversified Financials 52 WK Hi: $46.49 MS FV Uncertainty: Above Average EPS (FY1): 4.77 Last Fiscal Qtr. End: Less Than 8 WK: No Mean LT Growth: 7.15% % Inst. Ownership: Inst. Ownership- Net Buy: Y N Market Cap (in Billions): $158.3 Billion 52 WK Low: $28.28 MS Consider Buying: $30.60 EPS (FY2): 5.20 If Less Than 8 WK, next Earnings Ann. Date: Yes 10/12/2012 PEG: 0.90 Short Interest Ratio: Ratio Analysis Company Industry Sector P/E (TTM) 9.64 20.17 32.94 P/S (TTM) 1.69 4.61 5.32 P/B (MRQ) 0.86 1.52 1.27 P/CF (TTM) 7.11 6.24 12.54 Dividend Yield 2.88 2.27 1.98 Total Debt/Equity (MRQ) 367.88 154.25 150.21 Net Profit Margin (TTM) 19.12 19.09 16.84 ROA (TTM) 0.79 0.52 0.91 ROE (TTM) 9.24 6.59 5.55 Stop-Loss Price: $29.44 # of Shrs. O/S (in Millions): 3,798.75 EBO Valuation: $44.33 MS Consider Selling: $79.10 MS Star Rating: Four Stars Analyst Consensus Recommendation: Outperform Beta: 1.33 Short as % of Float: 1
Investment Thesis: I believe JPMorgan Chase will be a terrific investment for the Cougar Investment Fund. JPM provides exposure to the financial services sector, and includes slightly higher risk than the S&P 500 (1.33 beta). Performance of large banks such as JPM closely follows global economic events. Though there is some uncertainty in the Euro-crisis and future political results, analysts are generally very bullish on JPM. Being such as large financial institution, JPM is highly covered by analysts of all types. General consensus amongst different rating websites is moving towards Buy and Outperform ratings. JPM has performed very strong in the past several weeks, and I believe this will continue into Q1 of 2013. The fact that JPM has substantially underperformed the S&P 500 in the past six months is also promising (shows potential to outperform). I have set my target price for JPM is between its current 52-week high and Morningstar s expected target price. If my target price is met, a 19% return on the equity is feasible. Summary Provide brief summary of your analysis in each section that follows Company Profile: One of the largest banks in the financial services sector. One of the largest banks in the diversified financial services industry. Large exposure and highly regulated. Fundamental Valuation: JPM is more properly valued by its P/B ratio. All large banks have seen a significant decline in valuation during recent years, making P/E difficult to use. Relative Valuation: JPM s valuation is similar to its competitors. When using the Relative Valuation method, the company s future potential appears to be flat. Revenue and Earnings Estimates: JPM has met or exceeded analyst expectations for earnings in each of the past nine quarters. Q3 results will be released on 10/12/2012. Analyst Recommendations: Generally Buy and Outperform. Analysts appear to be very bullish on JPM. Institutional Ownership: Very high. Large institutional ownership is understandable for a bank as large as JPM. Nearly 70% institutional owners. Short Interest: Short-term interest is consistent with that of competitors BAC and WFC. Large volatility was experienced in September. Stock Price Chart: JPM has underperformed the S&P 500 in recent months. Over the past six months, JPM has delivered performance nearly 10% below the S&P 500. 2
Section (B) Company Profile (two pages maximum) Company Summary: JPMorgan Chase is a large financial holding company which provides financial services worldwide. Consumers are often familiar with its branch locations, titled JPMorgan Chase Bank. It is a leading global financial services firm, as well as one of the largest banking institutions in the United States. JPM is a leader in investment banking, consumer financial services, commercial banking, asset management, and private equity. The company has $2.3 trillion in assets, and $183.6 billion in stockholders equity. JPM 10-k: http://www.sec.gov/archives/edgar/data/19617/000001961712000163/corp10k2011.htm Business Model, Competition, Environment and Strategy It is a direct competitor of Bank of America (BAC), and Wells Fargo (WFC). It is classified within the diversified financial services industry of the financial sector. JPM is one of the top few largest banks in the United States, as well as one of the top three largest in the S&P index. Its performance is closely tied to the global economy as well as many U.S. indices. JPM is headquarters in New York City and currently has over 260,000 full-time employees. JPM competes with any other large banks, investment banking companies, merchant banks, hedge funds, commodity trading companies, private equity, consumer credit, and mortgage lenders. In general, large consolidation has recently taken place in the financial services industry. Mortgage lending is an example of an industry that is now highly restricted. The Firm is subject to regulation under state and federal laws in the United States, as well as the applicable laws in each of the various jurisdictions outside of the United States in which the firm does business. JPM 10-k: http://www.sec.gov/archives/edgar/data/19617/000001961712000163/corp10k2011.htm Revenue and Earnings History REVENUE Periods 2010 2011 2012 March 27,671 25,221 26,712 June 25,101 26,779 22,180 September 23,824 23,763 3
December 26,098 21,471 Note: Units in Millions of U.S. Dollars EARNINGS PER SHARE Periods 2010 2011 2012 March 0.74449 1.27949 1.19398 June 1.08923 1.27209 1.21293 September 1.01186 1.01648 December 1.12116 0.89855 Note: Units in U.S. Dollars CONSENSUS ESTIMATES ANALYSIS # of Estimates Mean High Low 1 Year Ago SALES (in millions) Quarter Ending Dec-12 21 23,909.10 25,858.00 21,559.20 25,476.10 Quarter Ending Mar-13 11 25,637.90 27,507.00 23,573.00 24,529.30 Year Ending Dec-12 25 97,757.80 103,425.00 93,059.50 101,662.00 Year Ending Dec-13 26 100,216.00 107,678.00 93,288.00 104,060.00 EARNINGS (per share) Quarter Ending Dec-12 27 1.14 1.38 0.90 1.37 Quarter Ending Mar-13 18 1.27 1.47 1.04 1.42 Year Ending Dec-12 31 4.77 5.41 4.25 5.27 4
Year Ending Dec-13 32 5.20 6.00 4.35 5.86 LT Growth Rate (%) 7 7.15 10.00 4.73 8.85 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $- Total Net Revenue (per quarter, in millions) 2010 - Q1 2010 - Q2 2010 - Q3 2010 - Q4 2011 - Q1 2011 - Q2 2011 - Q3 2011 - Q4 2012 - Q1 2012 - Q2 Response: During each of the past three year s revenue appears to be consistent, but gradually declining. This is most likely due to increased federal regulation and overall lower consumer involvement with JPM. Overall, sales revenue estimates and earnings estimates are lower than they originally were one year ago. This is likely due to a slowing economy and troubles related to the Euro-crisis. JPM has met or exceeded earnings estimates set by wall-street analysts in each of the last nine quarters. 5
Section (C) Fundamental Valuation (EBO) Include the following here: Inputs (provide below input values used in your analysis) EPS forecasts (FY1 & FY2): _4.77 & 5.20 Long-term growth rate: _7.15% Book value /share (along with book value and number of shares outstanding): Book value: $175,773 (millions)_ # of shares outstanding: 3,772 (millions) Book value / share: $46.59 Dividend payout ratio: 26.18% Next fiscal year end: 2012 Current fiscal month: 10 Target ROE: 11.85% 6
Output Above normal growth period chosen: 12 EBO valuation (Implied price from the spreadsheet): $44.33 Sensitivity Analysis EBO valuation would be (you can include more than one scenario in each of the following): $45.57 if changing above normal growth period to 13 $49.61 if changing growth rate from mean (consensus) to the highest estimate 10% $40.43 if changing growth rate from mean (consensus) to the lowest estimate 4.43% $45.39 if changing discount rate to 8% $40.29 if changing target ROE to 5.55 Section (D) Relative Valuation From the top panel Discuss whether your stock and its competitors have very different multiples. Point out if any of the five stocks have multiple that is far off from the others. Make an attempt to explain why (you would want to read analyst research report in Morningstar Direct; you should also look for comments from other financial sites). The discussions should address all of the following valuation metrics: forward P/E, PEG, P/B (MRQ), P/S (TTM), and P/CF (TTM). 7
Compare the implied prices derived from various valuation metrics. Also compare those implied price to the stock s current price, and 52-week high and low. Response: Overall, JPM is priced very similar to its competitors. Each of these securities is currently priced far below book value. The only exception to this is Wells Fargo. Price to book seems to be a strong valuation method for these financial equities. When compared to price to earnings, the price to book valuation method provides a more accurate picture. The P/E ratios of each stock are relatively low here. JPM has a very high implied share price when valued based on the P/E ratios of Bank of America and Wells Fargo. PEG and Value Ratio appear to be close with competition. Barclay s ranks consistently lower in these categories, but its market capitalization is substantially smaller than all of the others. JPM also has a long-term growth rate which is much lower than competitors. JPM has a 5-year ROE average which is higher than most of its competitors, and particularly higher than Bank of America. From the bottom panel Discuss the various implied prices of your stock derived from competitors ( comparables ) multiples. How different are the prices derived from the various valuation metrics? Note any valuation metrics that seem to yield outlier prices and explain why (HINT: is that because that particular valuation metrics is not very relevant for the industry? Do you best to provide convincing arguments). For each valuation metrics, Compare the current price and 52-week high /low of your stock to the High-low range derived from multiples of its competitors. Among the valuation metrics analyzed, which ones do you think are most relevant as a valuation tool for your stock? Response: After evaluating this spreadsheet, it appears that P/B is the most accurate tool to value JPM. This is because its P/B ratio is consistent with competitors and shows how the company is valued when compared to its book value of assets. It appears that Bank of America s valuation metrics yield outlier prices for JPM. Valuing JPM based on the P/E ratios of competitors yields similar results to the stocks 52-week high and low. JPM s 52-week high is about $46. This is consistent what is found for Wells Fargo. JPM s 52-week low is about $28. This is consistent with what is found for Barclay s. Valuing JPM strictly on P/E ratio would not be sufficient, because all banks appear to be great buys when using this valuation method. 8
Section (E) Revenue and Earnings Estimates HISTORICAL SURPRISES Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Jun-12 21,790.90 22,892.00 1,101.09 5.05 Quarter Ending Mar-12 24,681.00 27,417.00 2,736.01 11.09 Quarter Ending Dec-11 22,996.60 22,198.00 798.56 3.47 Quarter Ending Sep-11 23,399.80 24,368.00 968.19 4.14 Quarter Ending Jun-11 25,131.80 27,410.00 2,278.15 9.06 Earnings (per share) Quarter Ending Jun-12 0.73 1.09 0.36 49.03 Quarter Ending Mar-12 1.18 1.28 0.10 8.65 Quarter Ending Dec-11 0.90 0.90 0.00 0.18 Quarter Ending Sep-11 0.91 1.02 0.11 12.41 Quarter Ending Jun-11 1.21 1.27 0.06 4.84 Response: JPM has met of exceeded earnings in each of the last nine quarters. It appears that in each of the past five quarters, JPM has slightly surprised the market with higher sales revenue. Each of the sales revenue estimates were exceeded by several billion dollars. This is very positive for JPM. Several times JPM has met earnings and the share price has grown consistently. In the second quarter of 2011, JPM actually exceeded analyst estimates, but the share price saw a substantial reduciton. This may have come as a result of reduced guidance, and a negative outlook on future proitability. As seein in the graph below, JPM generated a large amount of EPS for investors. The stock price has responsed accordingly. 9
CONSENSUS ESTIMATES ANALYSIS Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) # of Estimates Mean High Low 1 Year Ago SALES (in millions) Quarter Ending Dec-12 21 23,909.10 25,858.00 21,559.20 25,476.10 Quarter Ending Mar-13 11 25,637.90 27,507.00 23,573.00 24,529.30 Year Ending Dec-12 25 97,757.80 103,425.00 93,059.50 101,662.00 Year Ending Dec-13 26 100,216.00 107,678.00 93,288.00 104,060.00 Earnings (per share) Quarter Ending Dec-12 27 1.14 1.38 0.90 1.37 10
Quarter Ending Mar-13 18 1.27 1.47 1.04 1.42 Year Ending Dec-12 31 4.77 5.41 4.25 5.27 Year Ending Dec-13 32 5.20 6.00 4.35 5.86 LT Growth Rate (%) 7 7.15 10.00 4.73 8.85 Copy/paste the Consensus Estimates Trend Table from Reuters.com, Analysts tab (include both revenue and earnings) CONSENSUS ESTIMATES TREND Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Current 1 Week Ago 1 Month Ago 2 Month Ago 1 Year Ago SALES (in millions) Quarter Ending Dec-12 23,909.10 23,829.80 23,826.50 23,759.50 25,476.10 Quarter Ending Mar-13 25,637.90 25,607.20 25,639.50 25,679.20 24,529.30 Year Ending Dec-12 97,757.80 97,471.50 97,386.80 97,310.20 101,662.00 Year Ending Dec-13 100,216.00 100,194.00 100,156.00 100,264.00 104,060.00 Earnings (per share) Quarter Ending Dec-12 1.14 1.14 1.10 1.11 1.37 Quarter Ending Mar-13 1.27 1.27 1.26 1.27 1.42 Quarter Ending Dec-12 4.77 4.75 4.70 4.71 5.27 11
Quarter Ending Dec-13 5.20 5.21 5.20 5.25 5.86 Response: Trends in analyst estimates of sales revenue have generally increased from where they were several weeks ago (quarterly). Trends have also increased in analyst estimates from where they were nearly a year ago. Annual trends in sales revenue estimates are down from where they were one year ago. This is also true with estimates in EPS. Though trends are down with estimates from one year ago, trends are increasing from estimates set several months ago. Copy/paste the Estimates Revisions Summary Table from Reuters.com, Analysts tab (include both revenue and earnings) ESTIMATES REVISIONS SUMMARY Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Dec-12 6 1 8 3 Quarter Ending Mar-13 3 1 4 2 Year Ending Dec-12 7 1 9 3 Year Ending Dec-13 4 4 7 5 Earnings Quarter Ending Dec-12 3 1 13 2 Quarter Ending Mar-13 3 1 5 3 Year Ending Dec-12 2 1 11 3 Year Ending Dec-13 1 2 6 2 12
Response: Within the past several weeks, analyst estimates have generally been revised upwards. This is consistent with trends in sales revenue projects, as well as EPS. Projections for revenue in upcoming quarters have been revised upwards, as well as trends for quarterly and annual EPS. This shows that analysts are beginning to develop a positive outlook for JPM. Based on the fact that JPM has met or exceeded analyst estimates in each of the last nine quarters, I feel that JPM will exceed estimates again this week. Recent quarter earnings will be released on Friday, and I believe JPM will exceed the analyst estimates of 1.21 EPS (Q3). With all of the recent revisions in Morningstar and analyst outlooks, it seems as if the trend is optimistic. I do not believe the share price will have a significant response if earnings are met, but it earnings are somehow missed; I believe it will experience negative volatility Section (F) Analysts Recommendations ANALYST RECOMMENDATIONS AND REVISIONS 1-5 Linear Scale Current 1 Month Ago 2 Month Ago 3 Month Ago (1) BUY 11 11 11 12 (2) OUTPERFORM 14 13 12 12 (3) HOLD 7 7 8 7 (4) UNDERPERFORM 2 2 2 2 (5) SELL 0 0 0 0 No Opinion 0 0 0 0 Mean Rating 2.00 2.00 2.03 1.97 Response: Generally, analyst estimates are turning more bullish for JPM. There are currently 11 Buy ratings, and 14 Outperform ratings. This is consistent with Morningstar s general 13
outperform rating. There are very few analysts with Sell or Underperform ratings. Earnings will be released within 48 hours; therefore, I believe analysts are confident in their predictions. I typically refer to Fidelity for investment advice. Analysts on this site are also very bullish regarding JPM. The current rating is an 8.4 out of 10. Many analysts cover JPM because it is one of the largest banks in diversified financial services. Most analysts appear to be very optimistic about JPM s future performance, especially when compared to other large banks. Section (G) Institutional Ownership Copy/paste the completed CIF Institutional Ownership spreadsheet here. Combine information provided in all three sections to discuss whether (1) institutions, on net basis, have been increasing or decreasing ownership and how significant, (2) the stock has sizable institution interests and support, (3) the extent of the (> 5%) owners, and (4) this could be a bullish or bearish indication of future stock price movement. Response: Overall, institutional ownership is fairly high. There are no institutions which own at least five percent of JPM. It is generally a wash between the number of increased positions and decreased positions JPM is a large diversified financial services company, giving it sizable institutional support. 14
Section (H) Short Interest JPM Short Interest Settlement Date Short Interest Avg Daily Share Volume Days To Cover 9/14/2012 43,687,822 28,915,401 1.510884 8/31/2012 39,502,457 18,415,359 2.145082 8/15/2012 42,136,602 22,473,800 1.874921 7/31/2012 43,078,606 36,853,838 1.168904 7/13/2012 43,284,322 41,415,751 1.045117 6/29/2012 46,073,341 49,286,397 1.000000 6/15/2012 47,135,438 49,193,520 1.000000 5/31/2012 41,715,292 60,222,091 1.000000 5/15/2012 28,505,984 57,445,840 1.000000 4/30/2012 28,456,078 26,748,066 1.063856 4/13/2012 28,264,796 35,674,883 1.000000 3/30/2012 38,950,250 33,189,139 1.173584 3/15/2012 32,573,235 41,423,252 1.000000 2/29/2012 31,470,171 28,718,515 1.095815 2/15/2012 28,034,303 27,902,476 1.004725 1/31/2012 34,023,037 34,560,778 1.000000 1/13/2012 40,619,899 38,007,978 1.068720 15
12/30/2011 33,426,569 31,162,398 1.072657 12/15/2011 35,437,910 46,050,573 1.000000 11/30/2011 38,526,401 42,875,829 1.000000 11/15/2011 41,464,544 37,069,781 1.118554 10/31/2011 47,834,244 48,095,336 1.000000 10/14/2011 45,400,164 53,617,755 1.000000 Read more: http://www.nasdaq.com/symbol/jpm/short-interest#ixzz28qulwaak WFC Short Interest Settlement Date Short Interest Avg Daily Share Volume Days To Cover 9/14/2012 51,274,853 25,892,467 1.980300 8/31/2012 45,706,541 17,290,993 2.643373 8/15/2012 37,838,248 18,786,969 2.014069 7/31/2012 42,561,057 23,899,370 1.780844 7/13/2012 47,052,910 23,050,576 2.041290 6/29/2012 46,699,851 26,415,398 1.767903 6/15/2012 52,038,418 34,040,964 1.528700 5/31/2012 44,575,027 31,186,371 1.429311 5/15/2012 36,042,542 26,678,021 1.351020 4/30/2012 32,364,845 22,980,827 1.408341 4/13/2012 30,011,495 28,610,155 1.048981 16
3/30/2012 30,937,261 30,502,921 1.014239 3/15/2012 32,870,424 32,914,133 1.000000 2/29/2012 29,209,826 29,577,141 1.000000 2/15/2012 34,224,845 28,046,358 1.220296 1/31/2012 33,908,908 36,401,158 1.000000 1/13/2012 47,129,732 34,119,034 1.381333 12/30/2011 42,304,767 27,302,382 1.549490 12/15/2011 46,527,722 29,816,747 1.560456 11/30/2011 54,390,740 33,912,585 1.603851 11/15/2011 48,911,712 34,389,234 1.422297 10/31/2011 54,382,791 49,940,635 1.088949 10/14/2011 62,000,942 43,953,548 1.410602 Read more: http://www.nasdaq.com/symbol/wfc/short-interest#ixzz28qvo8mec BAC Short Interest Share on facebook_likeshare Share on facebookshare on twittershare on emailshare on print Settlement Date Short Interest Avg Daily Share Volume Days To Cover 9/14/2012 204,515,743 203,075,817 1.007091 17
8/31/2012 216,419,831 109,499,787 1.976441 8/15/2012 220,297,162 90,230,803 2.441485 7/31/2012 224,563,797 147,102,809 1.526577 7/13/2012 225,438,149 116,626,780 1.932988 6/29/2012 231,004,224 175,726,130 1.314570 6/15/2012 254,590,796 209,511,590 1.215163 5/31/2012 263,184,398 201,200,575 1.308070 5/15/2012 150,700,826 182,987,165 1.000000 4/30/2012 142,328,908 198,832,118 1.000000 4/13/2012 129,449,602 236,295,150 1.000000 3/30/2012 141,165,147 346,290,668 1.000000 3/15/2012 143,114,063 274,159,980 1.000000 2/29/2012 152,021,136 257,999,158 1.000000 2/15/2012 154,408,018 331,204,526 1.000000 1/31/2012 148,103,043 280,300,821 1.000000 1/13/2012 186,089,564 331,778,143 1.000000 12/30/2011 157,043,447 215,740,357 1.000000 12/15/2011 146,194,541 255,782,850 1.000000 11/30/2011 187,086,615 286,536,693 1.000000 11/15/2011 238,719,041 255,046,699 1.000000 10/31/2011 189,889,789 278,070,154 1.000000 10/14/2011 201,261,805 287,911,838 1.000000 18
Read more: http://www.nasdaq.com/symbol/bac/short-interest#ixzz28qvuxncu Complete the following table with information from the share statistics table. Avg Vol Avg Vol Shares (3 month) (10 day) Outstanding Float 26,827,000 22,428,800 3.8 billion 3.78 billion Shares Short Short Ratio Short % of Float Shares Short (Most recent date) (Most recent date) (Most recent date) (2 weeks prior) 43.69 billion 1.90 1.10% 39.50 million Response: I would say the stock has become much more volatile in recent times. This has most likely come from the Euro-crisis, recent economic troubles, and uncertainty as an election year. The average 3 month volume has increased. Section (I) Stock Charts 19
A three months price chart A one year price chart A five year price chart 20
Additional price chart If you have other stock charts, feel free to copy/paste here Response: It appears that all three financial stocks respond to economic events in a similar sequence. This is true over three month, one year, and three year periods. It appears JPM has slightly underperformed the S&P 500 and overall industry in the past six months. This can be 21
seen in the additional graphs segment. Citigroup has also performed over 10 percent better than JPM in the past three months. JPM is also listed within the Dow Jones, giving it a close resemblance to this index as well. 22