J.P. Morgan (NYSE:JPM) is a multinational financial services firm situated in the United States. The firm provides investment banking, trading, corporate & consumer loans, and asset management services.
The stock has performed well year-to-date, with a gain of around 30%, beating the S&P 500 (SPX) by 12%. Historically speaking, the bank’s stock has correlated positively with the U.S. 10-year yield, which is anticipated to rise during 2022; In addition, J.P. Morgan has recently released its Q-3 earnings, where it beat analysts’ expectations.
Many may be wondering whether the earnings beat and the 10-year yield could provide enough substance for further stock price appreciation. I am bullish on the stock as I believe it will provide enough substance; here’s why.
Basel III Stress Test
Before considering at the company’s earnings release, it’s pivotal to examine its half-year stress test that took place on June 28th this year.
J.P. Morgan has immaculate capital adequacy, with its 11.2% Tier 1 Capital Ratio trading well above the 4.5% requirement, and its Total Capital Ratio of 14.7% also exceeding the 13.2% benchmark.
The bank’s management is experienced, which assists the validity of the stress test. Although there’s an overhaul on its way, Jamie Dimon‘s still carrying the mantel, and has done so successfully for many years.
Based on the successful stress test, quarterly dividends and stock buybacks were already approved in June.
Companies usually ramp up their earnings toward year-end through accounting techniques, but J.P. Morgan has now beat its revenue estimates for a sixth straight quarter, suggesting that its sustainability isn’t something worth questioning.
J.P. Morgan reported revenue of $29.64 billion (+1.7% Y/Y) and an EPS of $3.74 ($0.74 beat).
Although total markets revenue decreased by 5% and fixed income by 30%, the firm’s equity markets revenue increased by 30%, along with a 21% increase in deposits.
Looking forward, I expect loan demand to move higher before interest rates rise; the firm will also be able to provide better returns on loans, as they’ll be able to charge higher premiums with an increased 10-year bond yield.
Approximately 39% of the company’s business derives from interest-based income, which means that as the debt market reverts to its mean, we could see improved earnings.
Although most signs are positive, I am concerned about the decline in fee-based revenue, which draws down the sustainability of the firm’s earnings. J.P morgan also beat revenue based on pre-provisions, and it has to be questioned whether elevated provisions and allowances could be problematic in the future.
The stock itself is undervalued according to key metrics. J.P. Morgan is trading at a PE ratio of 21.60% below its 5-year average while also maintaining a PEG of 0.10, which means the company’s growth exceeds its stock price.
Furthermore, a 106.24% increase in year-over-year diluted EPS suggests that shareholder value has increased immensely. J.P. Morgan stock is also providing a 1,099.20% better return on common equity than historical averages.
Wall Street & Hedge Fund Insights
Wall Street thinks the stock is a Moderate Buy, with an average JP Morgan price target of $175.64, implying an upside of 5.4%. There have been 8 Buy ratings on the stock, as well as 2 Hold and 1 Sell ratings. The latest rating is from Steven Chubak of Wolfe Research, who placed a $174 price target on the stock.
Hedge funds remain neutral on the stock, and I suspect this to be due to a lack of volatility. Nonetheless, the likes of Echo Street Capital, Carlson Capital LP, and Graham Capital Management recently added J.P. Morgan stock to their portfolios.
J.P. Morgan will likely benefit from an improving debt market. The firm’s stress test provides a solid foundation for earnings to blossom. I think J.P. Morgan is a good choice at the moment, considering the possibility of a rise in the 10-year and key valuation metrics.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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