JPMorgan: Falling Back to Earth After Q1 Results?

Company Update (JPM US) (Buy): We believe investors can make money from here, potentially with a 10%+ annualized return if P/E re-rates to 14.5x.

Highlights

• After falling 6.5% on Friday, P/TBV is at 2.1x P/TBV and P/E is likely 12.2x.

• ROTCE was 21% in Q1 2024, vs. the 17% target, but JPM is over-earning.

• Deposit margins are still too favourable; credit costs have mostly normalized.

• JPM has too much capital; Dividend Yield is now 2.5% and buybacks continue.

• At $182.79, we see a total return of 35% (11.9% p.a.) by end of 2026. Buy.

Introduction

We review JPMorgan (“JPM”) after shares fell 6.5% on Friday following the release of Q1 2024 results.

We last wrote about JPM in January (following JPM’s Q4 2023 results, when the share price was $167.47), when we reiterated our Buy rating. Even after Friday’s decline, JPM’s share price has still risen another 9.1% since our last article:

JPM Share Price (Last 5 Years)

Source: Google Finance (14-Apr-24).

(Notwithstanding our Buy rating, we have been too conservative on valuation, having removed JPM from our “Select 15” model portfolio last September at $144.96. We did retain its close peer Bank of America in “Select 15” until last month, and during this time Bank of America returned 31.1%, behind JPM’s 35.7% gain in the same period.)

We attribute Friday’s price decline to downbeat management comments, again reminding investors that JPM is currently over-earning, and with CEO Jamie Dimon expressing reservations about share repurchases at the current price.

At $182.79, JPM shares are at 2.1x Price / Tangible Book Value (“TBV”). Relative to management’s longstanding target of a 17% average, across-the-cycle Return on Tangible Common Equity (“ROTCE”), this implies a P/E of 12.2x. The key questions are again whether this ROTCE target is realistic and what P/E multiple JPM stock deserves.