JPMorgan Chase: Fortress balance sheet, share buybacks (NYSE: JPM)

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Alex Wang

J. P. Morgan (NYSE:JPM) rose on Friday after reporting strong results. Despite the pessimism on Wall Street, the company delivered strong credit and delinquency performance, leading to robust earnings growth (after normalizing credit reserves). Whereas CEO Dimon was more tempered and maintained an understandable level of conservative optimism it is a company that is trading well below historic earnings multiples and is expected to resume share buybacks early next year. In the meantime, the 3.7% dividend yield adds another reason to continue holding a proven growth compound.

JPM share price

JPM is far from an unprofitable tech stock, but the stock is still down more than 30% from recent highs.

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I last covered JPM in September and the stock has since fallen 5%. I rated the stock as a buy at the time, but clearly I was too conservative as the company proved to be much more resilient than I had expected.

JPM Stock Key Indicators

The last quarter saw a strong increase in revenue as the company benefited from rising interest rates. Reported earnings per share of $3.12 was higher sequentially and lower year over year, but it should be noted that the third quarter of 2021 benefited from a release of credit provisions in the event of pandemic. Assuming more normalized provisions for credit losses, earnings per share increased about 12%.

financial overview

Press release Q3 2022

Perhaps to the surprise of many, consumer credit metrics remained strong – very strong in fact – while write-off rates and non-performing loans held steady.

consumer division

Presentation Q3 2022

On the conference call, management noted that charge rates were below pre-pandemic levels but “normalizing.”

JPM made further progress in strengthening its balance sheet, with its CET1 capital ratio standing at 12.5%. Management continues to guide for 12.5% ​​and 13% for Q4 and Q1 2023, respectively.

balance sheet

Presentation Q3 2022

Management also noted that it hopes to be able to resume share buybacks early next year after achieving that 13% CET1 ratio target. For those new to the name, it should be noted that JPM historically maintains a fortress balance sheet with a considerably higher CET1 ratio than its peers.

Looking ahead, JPM guided another quarter of strong net interest income growth (net interest income was $13.7 billion in the fourth quarter of last year).

outlook

Presentation Q3 2022

Management noted on the conference call that it had previously guided for a fourth quarter net off-market interest rate of $66 billion with expectations for some upside in 2023. The current forecast implies a rate of execution of about $76 billion and management expects a slight drop from that. for 2023.

Is JPM stock a buy, sell or hold?

This is not 2008. This is an important detail to remember as bank stocks continue to trade weakly. Consensus estimates call for double-digit earnings growth over the next 3 years.

consensus estimates

Looking for Alpha

JPM’s 5-year average is around 12 times earnings, so the stock looks undervalued at just 10 times earnings this year. I am of the opinion that even 12 times earnings is too conservative for a company that has historically distributed all of its earnings through dividends and stock buybacks.

Is the economy out of the woods? CEO Dimon seems to be doing everything possible to level expectations.

I think we’re in a bit of a weird environment, which is very strong consumer spending. You see it in our numbers, you see it in other people’s numbers, up 10% before last year, up 35% before COVID. Balance sheets are very good for consumers. Credit card borrowing is normalizing and not getting worse. You could see – and that’s really good. So you go into a recession, you have a very strong consumer. However, it’s pretty predictable if you look at how they spend and inflation. So inflation is 10% — reduce that by 10%. And that extra cap – the money they have in checking accounts will probably run out around the middle of next year. And then, of course, you have inflation, higher rates, higher mortgage rates, oil — the volatility war. So those things are out there, and it’s not a crack in the current numbers. It’s quite predictable. This will put a strain on future numbers.

In other words, although the company is doing very well, CEO Dimon doesn’t want investors to get too excited because things can always get worse. But even he may be too pessimistic – at least from a stock market perspective. Given the high target CET1 ratio of 13%, the ramifications of any doomsday scenario are unlikely to be bankruptcy or even dilution, but rather simply needing a few quarters to build the balance sheet. Indeed, the Great Financial Crisis of 2008-2009 led banks to be heavily regulated, so financial crises of a similar magnitude will probably never happen again. With this in mind, I consider the current multiple of 10x earnings to be overly pessimistic, as the bearish scenario is actually much safer than intuition might imply. This is the kind of stock I could see repricing in the 15x to 25x earnings range over the long term, with 15x being my target multiple after market crashes. This suggests 50% upside potential from a multiple expansion just at the bottom of this range.

What are the risks here? Maybe something worse than the Great Financial Crisis is happening – though that’s probably not the most likely risk. Instead, big banks may be disrupted by more nimble online banks that offer higher returns on checking and savings accounts. JPM often receives high marks from the investment community due to the higher margins, but that doesn’t imply a stronger customer experience. In my anecdotal experience, JPM has more account maintenance fees than its competitors and last year I was unable to import stock trades into TurboTax – a problem many others have faced. I can’t say with great confidence that JPM will continue to aggregate deposits as it has in the past unless it is willing to invest more in the consumer experience. It is possible that over time, JPM will begin to experience multiple contractions against more nimble peers, which will put pressure on the stock price.

Nonetheless, the strong balance sheet and management leadership justify the relative premium at the moment and at 10x earnings, the decline seems more than priced in. I rate the stock as a buy.

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