JPMorgan: Still Undervalued Despite Recent Run Up

Even after the recent run up in share price JPMorgan (JPM, Financial) is still undervalued an offering potential investors a 14% to 17% pretax return. James Dimon has proven to be an effective CEO and chairman, leading the company through the financial crisis and SEC investigation still intact with its earning power not hurt or weakened at all. JPMorgan is one of the best manage and profitable banks in the world. From comsumer banking, to investment banking, JP Morgan stands out in every aspect of its business compared to the firm competitors. Even after paying out $24 billion in SEC fines for wrongdoing by Bear Stern and Washington Mutual which the firm acquired in 2008. The firm still was profitable and the fines didn't hurt JPMorgan's earnings power. The fact the JPMorgan had to pay out $24 billion for wrongdoing done by Bear Stern and Washington Mutual before the financial crisis, even after the Government begged JPMorgan to acquired by companies with the support of the government behind those acquisitions.

JPMorgan's (JPM, Financial) recent earnings

For the six months ending in June 30 2014, net interest income decreased 3% to $25.65 billion. Net interest income after loan loss provision decreased 5% to $19.92 billion. Net income applicable to common stockholders decreased 14% to $10.47 billion. Net interest income after loan loss provision reflect Comsumer & Business banking segment decreased 11% to $12.32 billion and Corporate & Investment Banking segment decreased 11% as well to $4.8 billion.

Quarterly Income Statements

Quarterly Cash Flow Statements

Valuation

Even with a quarter loss in two business segments doesn't make for a trend or if it will follow into the last two quarter of the fiscal year. The firm's earning power was damaged by the $11 billion loss by the London whale, or by the 24 billion in SEC fines so the quarter loss in two business segments damaging the company's earnings power is very low. The firm is currently sell at 8x its pretax earnings and 1.1x its book value. JPMorgan had in 2013, pretax earnings of $29 billion or $7.76 per share. Based on pretax earnings and sold at 10x its pretax earnings then JPMorgan would sell for $77 per share and offer investors at least a 13% pretax return. The firm has said under a more normal environment where escalated credit and legal cost come down then the firm would earn $24 billion in net income. Assuming no change in the environment, but just a normalization of all of JPMorgan big items. This means the company has normalized earnings of $24 billion or $6.31 per share. Based on normalized earnings, JPMorgan is selling for 9.5x normalized earnings not the reported 15x earnings. In the second slide the company shows how the company's growth initiatives will allow the company to earn more than $24 billion over time. The company doesn't say when earnings will get to $27.5 billion, and the CEO hints that the company will soon then later earn $27.5 billion. Let's use the $27.5 billion as normalized earnings, add in the growth initiatives and the $1.3 billion increase from a 100 basic point increase in interest rates. That would give the company a $39 billion pretax earnings –Â then you have to deduct $1.5 billion in preferred dividends leaving you with a pretax earnings of $37 billion or $9.94 per share. That means based on this JP Morgan is selling for 6x pretax adjusted earnings. Based on this the company would sell for $99.40 per share. Currently JPMorgan is selling for 2.5x its free cash for far below the banking sector average. If the company just sold at the same average Wells Fargo than the company would sell for $141 per share. JPMorgan is still undervalued an offers investors an above average return an a margin of safety of at least 20%. The company has an value range of $77 to $99 per share.