ModernGraham Valuation: JP Morgan Chase (JPM)


Company Profile (obtained from Google Finance): JPMorgan Chase & Co. (JPMorgan Chase) is a financial holding company. The Company is a global financial services firm and a banking institution in the United States, with global operations. The Company is engaged in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management and private equity. JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National Association (JPMorgan Chase Bank, N.A.), and Chase Bank USA, National Association (Chase Bank USA, N.A.). JPMorgan Chase’s activities are organized into four business segments, as well as Corporate/Private Equity. The Company’s consumer business is the Consumer & Community Banking segment. The Corporate & Investment Bank, Commercial Banking, and Asset Management segments consists of the Company’s wholesale businesses.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass all 6 of the following tests: Score = 6/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

Key Data:

MG Value $143
MG Opinion Undervalued
Value Based on 3% Growth $65
Value Based on 0% Growth $38
Market Implied Growth Rate 1.78%
PEmg 12.05
PB Ratio 0.98

Balance Sheet – 6/30/2013 (an Introduction to the Balance Sheet)

Total Debt $293,808,000,000
Total Assets $2,463,309,000,000
Intangible Assets $49,917,000,000
Total Liabilities $2,256,639,000,000
Outstanding Shares 3,759,190,000


Earnings Per Share – Diluted

2013 (estimate) $4.04
2012 $5.57
2011 $4.84
2010 $3.96
2009 $2.24
2008 $0.84
2007 $4.38
2006 $3.82
2005 $2.32
2004 $1.45
2003 $3.24
2002 $0.8

Earnings Per Share – Modern Graham

2013 (estimate) $4.48
2012 $4.29
2011 $3.52
2010 $2.92
2009 $2.51
2008 $2.62


JP Morgan Chase is a very intriguing financial company, based on its earnings growth over the last 10 years.  The company passes all of the tests required for both the Defensive and Enterprising Investor because it has strong financials.  From a valuation perspective, the company fares well in the ModernGraham valuation model after achieving significant growth in EPSmg (normalized earnings) of $2.62 in 2008 to an estimated $4.48 in 2013.  The market is currently implying further growth of only 1.78%, which should be easily beatable by such a large bank.  As a result, investors of all kinds should be interested in JP Morgan Chase and should do further research to determine whether it would be a suitable investment for them individually.

What do you think?  Is JP Morgan Chase undervalued or does Mr. Market have it right?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in JP Morgan Chase at the time of publication, and had no intention of purchasing a stake in the next 72 hours.

Photo Credit:  Andrew Magill





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