Ample Upside Potential At JPMorgan Chase

By Ryan C. Fuhrmann | January 18, 2012 AAA

Money center banking giant JPMorgan Chase (NYSE:JPM) reported full year 2011 results on Jan. 13, 2012, that saw revenues struggle but profits grow in the double digits. Despite the solid bottom line growth, shareholders that held the stock for the entire year lost 22% of their money, as the stock declined from above $40 per share to closer to $30 per share by year end.

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Full Year Recap
Total reported revenue fell 5% to $99.8 billion. The biggest detractors to the top line included a 46% decline in securities gains to $1.6 billion and 30% drop in mortgage fees and related income to $2.7 billion. Investment banking fees fell 5% to $5.9 billion, while income earned from carrying out financial transactions on behalf of bank customers declined 8% to $10 billion. The few pockets of strength included lending fee income, fees earned from asset management and credit card income, all of which increased in the low to mid single digits.

Net income ended up increasing 9% to $19 billion and benefited primarily from a 54% drop in provisions for credit losses to $7.6 billion. Noninterest expenses rose a modest 3% to $62.9 billion, as did income tax expenses, which rose 4% to $7.8 billion. Including the benefit of share buybacks, diluted earnings per share advanced 13% to $4.48.

Despite the weaker top line trends, JPMorgan reported solid profit growth for the year and boasted a return on equity of 11%. Book value ended the year at $46.59 per share, or 8% ahead of last year's level. The return on tangible common equity was also healthy at 15% as tangible book value ended the year at just under $30 per share. (To know more about income statements, read Understanding The Income Statement.)

For 2012, analysts currently predict a slight decline in revenues, but $4.81 in earnings for healthy year-over-year profit growth of more than 7%.

The Bottom Line
2011 was a tough year for investors in JPMorgan and banks in general. Over the past year, JPMorgan's stock is down roughly 20%, but rivals including Barclays (NYSE:BCS) and Citigroup (NYSE:C), both of which have more international exposure and are seen more susceptible to European financial market worries, are down closer to 40%. Domestic rivals, such as U.S. Bancorp (NYSE:USB) and PNC Financial Services (NYSE:PNC), experienced much stronger share price performance, but fundamentally JPMorgan continues to perform as well as any large bank out there.

Currently, the price-to-book ratio is 77% and price to tangible book ratio is 120%, both of which offer very reasonable entry points for a bank that should earn $5 per share within a couple of years. At a reasonable P/E of 10 off these eventual earnings, the stock has upside potential of more than 40%. The dividend yield is also quite decent at 2.8%, and should increase as economic conditions in the U.S. continue to improve. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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