JPMorgan Chase: The Most Expensive Of The Big Four (NYSE:JPM) – Seeking Alpha

JPMorgan Chase (NYSE:JPM) reported first quarter earnings that had positive and negative aspects for its fundamentals. The rising interest rates are pushing its net interest income higher but current market and economic conditions are causing its investment banking revenues to fall. The company’s guidance was the bright spot of its report as management is raising its expectations for the future. This is causing investors to flock to banking stocks as a safe haven during uncertain times; however, JPMorgan Chase appears to be the most expensive option.

A Quick Look at the First Quarter Report

In the bank’s first quarter report, estimates for profit fell short while revenue exceeded. The company achieved an EPS of $2.63 while $2.69 was expected. This also represents a 42% drop in profit from just one year earlier. Management claims the causes of this are the Russia-Ukraine conflict, worsening inflation, and supply chain issues.

As for revenues, the bank reported total revenue of $31.59 billion, beating expectations of $30.86 billion. This is due to rising interest rates allowing the bank to earn more in net interest income. However, it is important to note that this reported revenue is still lower than last year’s report by about 5%. The company also approved a $30 billion share buyback program.

Interest Income is Thriving But Investment Banking is Falling

In the first quarter, net interest income increased by 7% to $13.97 billion, beating estimates of $13.7 billion. The company also issued positive guidance that net interest income would reach more than $56 billion by the end of 2022, improving its expectations from January where the company stated it expects $50 billion. The company also stated it is on track to achieve its goal of a 17% return on tangible equity despite CFO Jeremy Barnum stating earlier this year that rising costs and other headwinds could cause the bank to miss expectations. The news of JPMorgan Chase now able to reach its goal caused the stock to rise 6.2% and signaled great news for other banks as well.

While interest income for the bank is thriving, non-interest revenue is not performing well. With the uncertainty the market and economy are facing right now, investment banking revenues are falling. In the first quarter report, investment banking revenue came in at $2.1 billion, missing estimates of $2.37 billion. This also represents a 28% drop in revenue, as well as a 31% drop in investment banking fees caused by lower equity and debt underwriting and a slowdown of mergers and security issuance. The future is not brighter for the bank too, as projections for the second quarter of 2022 are expecting a 45% drop in fees. The only bright spots for investment banking were fixed income desks and trading. Due to changes in rates and the Russia-Ukraine conflict, fixed income trading revenue came in at $5.7 billion and exceeded estimates by $800 million. Furthermore, equities trading revenue came in at $3.1 billion and topped estimates by $500 million. Trading activity also has seen an increase of roughly 15%-20%.

Investors are Looking to Banks for Safety

With insanely high volatility and uncertainty in the markets currently, investors are looking for something they feel is a sure bet. This is pointing them towards banks because of interest rates continuing to rise. This has caused multiple bank ETFs to outperform the market and see an increased inflow of cash.

With banks becoming a popular choice among investors and many catalysts being industry-wide, many are looking to get the most value for their money. This is leading them to compare many of the largest banks in the market and finding which is trading at the cheapest multiples. At this time, JPMorgan Chase has the highest P/B and P/TBV of any of the big four banks.

Is JPM Stock Undervalued?

When using average multiples for P/E, P/B, and P/TBV and combining them with consensus estimates for FY23, it does not appear the JPM stock is currently undervalued. With this method, a price target calculates to $107.94 and means the stock could continue to fall by another 14.4%. Therefore, I do not believe JPMorgan Chase’s stock is currently undervalued.

The average analyst price target for this stock is currently $157.47, giving an implied upside of 24.62%. If this is the case, the multiples would have to increase by large amounts assuming analyst estimates stayed constant. The P/E ratio would have to increase to 12.57, P/B would increase to 1.63, and P/TBV would increase to 1.99. These new multiples are far above the current average multiples of the other big banks and would mean that JPM stock would be trading at a large premium.

Many investors are pointing to JPMorgan Chase’s dividend as a reason for being valued higher than its competitors and claiming it is higher than the other options. However, Citigroup (C) has a higher dividend yield than JPMorgan Chase currently. As of writing this article, Citigroup has a dividend yield of 3.87% while JPMorgan Chase has a yield of 3.17%.

What Does This Mean for Investors?

JPMorgan Chase released mixed first quarter earnings that both beat and missed expectations. The bank is improving its guidance for the future and is exciting many investors, however the guidance appears to be beneficial to the entire banking industry. Many investors are noticing this and are looking for banking stocks that will give them the most value for their money. Currently, JPMorgan Chase has the highest valuation multiples of any of the Big Four banks (aside from Bank of America’s (BAC) P/E being slightly higher) and leads me to believe that it may not be the best choice right now. Before jumping into JPM stock, investors should consider the other banks that have cheaper multiples, like Citigroup which has multiples trading at decent discounts to JPMorgan Chase’s. Combine all of this with my belief that JPM stock is not currently undervalued, I believe that a Hold rating is appropriate for now.

Source: seekingalpha.com