Prepare for the Worst

Says from European estate: “It falls on someone like me to warn you clearly. I’m too rich to care about money – and too old to care what anyone thinks”

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When the world’s most powerful banker speaks, people listen. 

So when Jamie Dimon, CEO of JPMorgan Chase (JPM), spoke to Congress, he didn’t mince his words. 

He told government officials they “should be prepared for the worst.” About recent price increases, he said, “I don’t think you can spend $6 trillion and not expect inflation.” 

It’s been a tough year for bank stocks despite increases in net interest income, the difference between the rates banks pay depositors and charge borrowers.

However, some investors believe these stocks have hit a near-term bottom. 

JPM garners the second-most searches among financial pros looking at big banks, trailing behind only Bank of America (BAC).

Yet they see it as a best-in-breed stock that delivers more shareholder value than any of its peers.

With the banking giant off nearly 40% from its highs, is it a value play or a value trap?

JPMorgan Chase’s Business

JPMorgan Chase is the largest publicly traded bank in the U.S., with a market cap exceeding $320 billion. It operates its business via four segments: Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management. 

The firm has global locations but generates most of its revenues from the United States. 

It boasts $2.6 trillion in client assets under management and does business in over 100 global markets.  

In the last year, investment banking took a massive hit. JPM has been a victim of economic headwinds, and its stock has underperformed, declining by 32% year-to-date.

Last quarter, the company saw net income decline by 28% to $8.6 billion. A 61% year over year drop in investment banking revenue on a quarterly basis hurt the bank.Lower fees across products and $257 million of markdowns fueled this drop.

Revenue from capital market activities and mortgages has slowed down significantly. However, the firm did have its second-best quarter ever from fixed-income trading revenue. 

Financials

JPM has consistently grown its revenues over the years. 

From 2016 to 2021, it grew revenues 26%, making $121.6 billion in revenues in 2021.

However, its quarterly revenue declined 9.6% in its latest earnings release, and it’s unlikely the firm will top its 2021 revenues this year. 

Though many analysts believe a recession is on the way, the firm is better than it was during the 2008 financial crisis. Investors love its $4 annual dividend, a yield of 3.7%.

JPM has total cash of $1.4 trillion and total debt of $640.7 billion. Its total cash per share is an outstanding 487x.

Valuation

JPM trades at a P/E GAAP ratio of 8.3x, notably lower than its five-year average of 12.6x. That’s also lower than Bank of America at 9.4x, Wells Fargo (WFC) at 9.5x, and The Toronto-Dominion Bank (TD) at 9.9x. Only Citigroup (C)’s 5.2x is lower.

JPM trades at a price-to-sales ratio of 2.5x, materially lower than its five-year average of 3.6x. Only WFC at 2x and C at 1.1x have lower price-to-sales ratios. However, peers can’t compete on price to cash flow. JPM’s is 2.3x, significantly better than BAC at 61x, WFC at 19.5x, and TD at 2.8x. 

Profitability 

JPM has a profit margin of 32.3% and an operating margin of 39.8%, making it one of the most profitable banks in the world. The firm has made $130.9 billion in gross profits over the last 12 months. 

Its return on equity of 13.6% is lower than only TD’s 14.3%. But no one can touch JPM and its $132 billion in cash from operations. The closest competitor is TD at $39.4 billion. 

Growth

Growth has been a struggle for JPM, as the firm’s year-over-year revenue growth has plunged 6.5%. WFC and C have also had negative revenue growth over the last 12 months. Only BAC and TD have managed to grow revenues over this time. Earnings-per-share (EPS) growth has also been disappointing. JPM’s has declined 16.8% over the last 12 months. Only BAC and WFC have had positive EPS growth over the same time.

Our Opinion 8/10

While it’s possible the economy will get worse and stocks will go lower, JPM remains one of the best-managed companies in the world. 

Buying the dip with it down more than 30% is a solid play here. 

The company has plenty of cash to weather the storm, and investors receive an attractive dividend for holding the stock. 

Starting a position at these levels and buying on dips should pay off in the coming years.