JP Morgan's Stock Disconnected From Its Fundamentals

By Ryan C. Fuhrmann | July 17, 2012 AAA

Money center financial titans Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) were among the first banks to report second quarter earnings results. JP Morgan's results weren't much of a surprise given it disclosed a huge trading loss prior to the end of the quarter. However, its ability to absorb the loss was surprising, and the bank has largely seen a recovery in its profitability from the depths of the credit crisis. Based off of negative sentiment, the stock could still rally.

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Quarterly Details
Total revenues fell 16.5% to $22.9 billion. Most operating units reported top-line declines. The most severe declines came from investment banking, which competes with pure play firms such as Jefferies (NYSE:JEF), Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS), as well as the corporate/private equity division that experienced negative revenue due to the $4.4 billion synthetic credit portfolio loss that has been widely covered in the news over the past few weeks.

Net income fell a less severe 9% to $5 billion, though the decline was only a slight $471 million from the $5.4 billion reported in last year's second quarter. The $4.4 billion loss was mostly offset by other gains, including a $1 billion gain in the same unit, a $545 million gain from a Bear Stearns note and $2.1 billion reduction in reserve loan losses as credit conditions continue to improve in the housing market and the banks credit card portfolio. Earnings ended up at $1.21 per diluted share.

Other second quarter metrics include a return on equity of 11%, total headcount of nearly 263,000 employees and quarter-end book value of $48.40 per share.

SEE: Understanding The Income Statement

The Bottom Line
Return on equity is likely back to normalized levels. This is reflected in analysts' earnings expectations of $4.61 for all of 2012, though the analysts expect a solid increase of 13.23% to $5.22 per share for all of 2013. Given the solid earnings levels and recent low share price, the price-to-book ratio of only 78% appears quite compelling. Prior to the financial crisis, the ratio was well above one.

SEE: 5 Must-Have Metrics For Value Investors

Additionally, back in 2006 JP Morgan paid out nearly 36% of its earnings in the form of a dividend. This suggests a current payout of $1.51 per share, or a dividend yield of around 4.3%. This is well above the current payout of 3.3%. Investors remain worried that risk controls are lacking at the bank given the huge trading loss, but overall it appears that it is generating impressive profitability and is likely to only get stronger as the domestic economy continues to improve.

At the time of writing Ryan C. Fuhrmann was long in shares of Wells Fargo, Goldman Sachs, Morgan Stanley and JP Morgan.

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