Thematic evaluation
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JPMorgan Chase & Co. (JPM)

September 27, 2024

Compared to: Citigroup, Inc. (C) | Wells Fargo & Co. (WFC) | Financial Select Sector SPDR Fund (XLF)

Our reasoning

JPMorgan Chase appears undervalued based on its strong financial performance, market leadership position, and growth prospects. The company's valuation multiples (P/E of 9.63 and EV/EBITDA of 5.38) are below industry averages and historical levels, despite its above-average profitability and returns. While risks exist, the current valuation seems to provide a margin of safety, especially considering the company's robust capital position and diverse business model.

Key takeaways
  • JPMorgan Chase & Co. (JPM) is a well-positioned and diversified financial services leader with strong revenue growth driven by higher interest rates and strong performance in its core businesses.
  • The company is highly profitable with strong growth in net income and a healthy level of margins.
  • JPM has a strong ability to meet its short-term obligations and generate cash flow from operations.
  • The company's financial flexibility is likely to remain strong, given its robust cash flow generation and capital position.
  • JPM's acquisition of First Republic Bank is expected to further strengthen its franchise, though the integration and performance of the acquired business poses risks.
  • The company faces a range of industry, operational, and legal/regulatory risks that could impact its future performance and growth prospects.
  • JPM's valuation is in line with its peers, reflecting its strong financial performance and growth prospects.
  • The company's stock price has generally outperformed the benchmark XLF over the long term, but its performance has been more volatile in recent quarters.
  • Management's guidance and analyst estimates suggest continued growth in earnings and revenue, but potential headwinds include economic uncertainty, regulatory changes, and competition in the financial services industry.
Undervalued
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Evaluation summary

  1. Company Overview:

    • JPMorgan Chase & Co. (JPM) is a leading financial holding company operating across consumer, commercial, and investment banking, as well as asset and wealth management. The company's core business model revolves around providing a comprehensive suite of financial products and services to a diverse client base, including individuals, businesses, institutions, and governments.
    • JPM's revenue is generated from various sources, including net interest income, non-interest income, and investment banking fees. Key revenue drivers include consumer and small business banking, commercial banking, financial transaction processing, and asset management.
    • JPM's target market is broad, encompassing individuals, businesses, and institutions across various industries and geographies. The company has a strong presence in the U.S. and a growing global footprint.
    • For comparative analysis, we will be using the Financial Select Sector SPDR Fund (XLF) as a benchmark and Wells Fargo & Co. (WFC) and Citigroup, Inc. (C) as industry peers.

  2. Financial Performance:

    • JPM has demonstrated strong financial performance in recent years, with consistent revenue growth driven by higher interest rates and strong performance in its core businesses.
    • Net income has grown steadily, reflecting the company's ability to manage expenses effectively and capitalize on favorable market conditions.
    • Profitability metrics, such as net profit margin and return on equity, are consistently above industry averages, indicating JPM's efficient use of capital and strong earnings generation.
    • ROA, ROE, and ROIC have all shown positive trends, indicating that JPM is effectively utilizing its assets and shareholder investments to generate profits.
    • Compared to its peers, JPM has generally outperformed WFC and C in terms of profitability and return on capital, highlighting its competitive advantage in the industry.

  3. Operational Efficiency:

    • JPM's balance sheet reflects a strong asset base, with significant investments in loans, securities, and other assets.
    • Working capital management has been efficient, with a healthy current ratio and quick ratio, indicating JPM's ability to meet short-term obligations.
    • Cash flow from operations has been robust, driven by strong earnings and efficient expense management.
    • Asset quality has been maintained at a high level, with minimal loan losses and a strong provision for risks and charges.
    • Free cash flow has been consistently positive, allowing JPM to invest in growth opportunities, return capital to shareholders, and maintain a strong financial position.
    • Capital expenditures have been relatively low, reflecting JPM's focus on organic growth and efficient asset utilization.
    • Dividends and share repurchases have been sustainable, demonstrating JPM's commitment to shareholder value creation.
    • Compared to its peers, JPM has shown higher operational efficiency, with a stronger cash flow generation capacity and a more conservative approach to capital expenditure.
    • Liquidity ratios, including the current ratio and quick ratio, have been consistently above industry averages, indicating JPM's strong ability to meet short-term obligations.
    • Debt-to-equity and leverage ratios have remained relatively stable, suggesting that JPM is managing its financial leverage effectively.

  4. Growth Opportunities:

    • JPM is actively pursuing growth opportunities through various strategies, including market expansion, M&A, and technological innovation.
    • The company is expanding its geographic footprint, targeting emerging markets with high growth potential.
    • JPM has a history of successful M&A activity, with recent acquisitions like First Republic Bank strengthening its franchise and expanding its market reach.
    • The company is investing heavily in technology and digital capabilities to enhance customer experience, improve operational efficiency, and develop new products and services.
    • JPM's strategic focus areas include expanding its consumer and commercial banking businesses, growing its investment banking and asset management operations, and leveraging technology to drive innovation and efficiency.
    • Management has demonstrated a strong track record of executing strategic plans, with a focus on disciplined capital allocation and a commitment to shareholder value creation.

  5. Risks and Threats:

    • JPM faces a range of risks, including economic downturns, market volatility, geopolitical tensions, regulatory changes, and cybersecurity threats.
    • The company's business is sensitive to macroeconomic conditions, with potential impacts from interest rate changes, inflation, and economic growth.
    • Regulatory scrutiny and evolving compliance requirements pose significant challenges for JPM, with potential impacts on its operations and profitability.
    • Cybersecurity threats and data breaches are a growing concern for financial institutions, with potential impacts on customer data, reputation, and financial performance.
    • Competition in the financial services industry is intense, with established players and new entrants vying for market share.

  6. Valuation Analysis:

    • JPM's valuation metrics, such as P/E ratio and EV/EBITDA, are generally in line with its peers, reflecting its strong financial performance and growth prospects.
    • Compared to its peers, JPM's valuation is slightly higher, reflecting its superior profitability and return on capital.
    • Potential catalysts for JPM's valuation include continued growth in its core businesses, successful integration of acquisitions, and favorable macroeconomic conditions.

  7. Price Performance:

    • JPM's stock price has generally outperformed the benchmark XLF over the long term, with notable outperformance in the 1-year, 2-year, and 3-year periods. However, JPM has underperformed XLF in the shorter periods, suggesting that JPM may be more sensitive to short-term market fluctuations.
    • Compared to its peers, JPM has generally outperformed WFC and C, with higher returns and lower volatility. However, JPM's performance has been more volatile in recent quarters, indicating that its risk profile may be changing.
    • JPM's beta value is slightly higher than XLF's, suggesting that JPM may be slightly more sensitive to market movements.

  8. Future Outlook:

    • Management's guidance for 2024 suggests continued growth in revenue and net income, driven by higher interest rates and strong performance in its core businesses.
    • Analyst estimates for JPM's future performance are generally positive, with consensus expectations for continued growth in earnings and revenue.
    • Potential headwinds for JPM's future performance include economic uncertainty, regulatory changes, and competition in the financial services industry.

  9. Summary:

    • JPMorgan Chase & Co. (JPM) is a well-positioned and diversified financial services leader with strong revenue growth driven by higher interest rates and strong performance in its core businesses.
    • The company is highly profitable with strong growth in net income and a healthy level of margins.
    • JPM has a strong ability to meet its short-term obligations and generate cash flow from operations.
    • The company's financial flexibility is likely to remain strong, given its robust cash flow generation and capital position.
    • JPM's acquisition of First Republic Bank is expected to further strengthen its franchise, though the integration and performance of the acquired business poses risks.
    • The company faces a range of industry, operational, and legal/regulatory risks that could impact its future performance and growth prospects.
    • JPM's valuation is in line with its peers, reflecting its strong financial performance and growth prospects.
    • The company's stock price has generally outperformed the benchmark XLF over the long term, but its performance has been more volatile in recent quarters.
    • Management's guidance and analyst estimates suggest continued growth in earnings and revenue, but potential headwinds include economic uncertainty, regulatory changes, and competition in the financial services industry.
    • Overall, JPM is a well-managed and financially sound company with strong growth prospects. However, investors should be aware of the risks associated with the company's business and the potential impact of macroeconomic and regulatory factors.
Peer fundamentals 
Fundamentals
Insights
  • JPMorgan Chase is a well-positioned and diversified financial services leader with strong revenue growth driven by higher interest rates and strong performance in its core businesses.
  • The company is highly profitable with strong growth in net income and a healthy level of margins.
  • The company has a strong ability to meet its short-term obligations and generate cash flow from operations.
  • The company's financial flexibility is likely to remain strong, given its robust cash flow generation and capital position.
  • The company's acquisition of First Republic Bank is expected to further strengthen its franchise, though the integration and performance of the acquired business poses risks.
  • The company faces a range of industry, operational, and legal/regulatory risks that could impact its future performance and growth prospects.
Analysis
  • Revenue - JPMorgan Chase's revenue growth is driven by a combination of higher interest rates and strong performance in its core businesses. - The company's investment banking, markets, and asset and wealth management businesses are performing well, contributing to the strong growth in non-interest income. - The company's acquisition of First Republic Bank has contributed to its strong financial performance.
    • Profitability
      • JPMorgan Chase is highly profitable, with strong growth in net income and a healthy level of margins.
      • The company's profitability is driven by its efficient expense management and strong performance in its core businesses.
      • The company's ROA and ROE are significantly higher than the industry average, indicating that it is more efficient at generating profits from its assets and shareholders' investment.
    • Liquidity
      • JPMorgan Chase has a strong ability to meet its short-term obligations, as evidenced by its high current ratio.
      • The company's large cash reserves and strong customer deposit base contribute to its strong liquidity position.
    • Solvency
      • JPMorgan Chase has a higher level of financial leverage than its peers, as evidenced by its high total debt to total equity ratio.
      • However, the company's strong profitability and cash flow generation suggest that it can manage this leverage effectively.
    • Operational Efficiency
      • JPMorgan Chase is efficient at utilizing its assets to generate revenue, as evidenced by its strong growth in loans and investments.
      • The company's strong performance in its core businesses and its ability to manage expenses effectively contribute to its operational efficiency.
    • Cash Flow Analysis
      • JPMorgan Chase generates strong cash flow from operations, driven by its core businesses and continued growth.
      • The company's financial flexibility is likely to remain strong, given its robust cash flow generation and capital position.
      • The company's acquisition of First Republic Bank has contributed to its strong cash flow performance.
    • Risk Factors
      • The company faces a range of industry, operational, and legal/regulatory risks that could impact its future performance and growth prospects.
      • These risks include potential impacts from economic conditions, market volatility, geopolitical tensions, and regulatory changes.
      • The company also faces operational risks related to cybersecurity, data management, and compliance with evolving regulations.
      • The integration and performance of acquired businesses like First Republic pose significant risks.
    • Future Outlook
      • JPMorgan Chase is well-positioned to continue to benefit from higher interest rates and strong growth in its core businesses.
      • The company's profitability is expected to remain strong, given its efficient expense management and continued growth in revenue.
      • The company's financial flexibility is likely to remain strong, given its robust cash flow generation and capital position.
      • The company's acquisition of First Republic Bank is expected to further strengthen its franchise, though the integration and performance of the acquired business poses risks.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-26)
Financial Select Sector SPDR Fund (XLF)
  • Performance Comparison:
    • JPM has generally outperformed XLF over the long term, with notable outperformance in the 1-year, 2-year, and 3-year periods. However, JPM has underperformed XLF in the shorter periods, such as the 1-month, 3-month, and 6-month periods. This suggests that JPM may be more sensitive to short-term market fluctuations.
  • Risk and Return Analysis:
    • JPM has provided higher annualized returns than XLF over the 1-year, 2-year, and 3-year periods. However, JPM has also exhibited higher annualized volatility than XLF, indicating a higher risk profile.
    • JPM's maximum drawdown of 38.77% in Q3 2022 is significantly larger than XLF's maximum drawdown of 25.81% in Q4 2022. This further confirms that JPM has a higher risk profile, as it is more susceptible to significant price declines.
  • Risk-Adjusted Performance:
    • XLF consistently shows a higher Sharpe ratio than JPM, indicating that XLF has better risk-adjusted returns over the period. This suggests that XLF has been able to generate higher returns for a given level of risk.
    • Both JPM and XLF have beta values below 1, indicating that they are less volatile than the overall market. However, JPM's beta values have been slightly higher than XLF's, suggesting that JPM may be slightly more sensitive to market movements.
  • Overall Assessment:
    • JPM has shown strong long-term performance, outperforming XLF in the 1-year, 2-year, and 3-year periods. However, JPM's higher volatility and larger drawdowns indicate a higher risk profile.
    • XLF has consistently demonstrated better risk-adjusted returns, as evidenced by its higher Sharpe ratio. This suggests that XLF may be a more suitable investment for investors seeking a more stable and less volatile investment.
    • Both JPM and XLF have a lower risk profile than the overall market, as indicated by their beta values below 1. However, JPM's slightly higher beta suggests that it may be slightly more sensitive to market movements.
    • Investors should carefully consider their risk tolerance and investment goals when evaluating JPM and XLF. While JPM has shown strong long-term performance, its higher risk profile may not be suitable for all investors.
Peers Price History(as of 2024-09-26)
Citigroup, Inc. (C)Wells Fargo & Co. (WFC)
  • Performance Comparison:
    • JPMorgan Chase & Co. (JPM) has generally outperformed its peers, Wells Fargo & Co. (WFC) and Citigroup, Inc. (C), over the analyzed period. JPM has consistently delivered higher returns, particularly in the longer-term periods like 2 years and 3 years. However, JPM's performance has been more volatile, with periods of significant underperformance, such as in the 1-month period.
    • While JPM has shown strong overall performance, its consistency relative to its peers has been mixed. It has outperformed in some periods but underperformed in others, suggesting that its performance may be more susceptible to market fluctuations.
  • Risk and Return Analysis:
    • JPM has delivered higher annualized returns compared to WFC and C, indicating that it has generated more profit for investors. However, this higher return comes with higher volatility.
    • JPM's annualized volatility is generally lower than WFC and C, suggesting that its stock price is less susceptible to sudden and large fluctuations. However, JPM's volatility has been increasing in recent quarters, indicating that its risk profile may be changing.
    • JPM's maximum drawdown of 38.77% is higher than WFC's 37.1% and C's 47.15%, indicating that JPM's stock price has experienced larger declines from previous peaks. This suggests that JPM may be more susceptible to market downturns.
  • Risk-Adjusted Performance:
    • JPM's Sharpe ratio is generally higher than WFC and C, indicating that it has been offering better risk-adjusted returns. This means that JPM has been able to generate higher returns for investors while taking on less risk.
    • JPM's beta value of around 1 suggests that it has a lower risk profile compared to WFC and C. This means that JPM's stock price is less likely to fluctuate as much as the overall market.
  • Overall Assessment:
    • JPM has demonstrated strong overall performance, with higher annualized returns than its peers. However, its performance has been more volatile, with larger drawdowns and a higher frequency of drawdowns.
    • JPM's lower volatility and higher Sharpe ratio suggest that it offers better risk-adjusted returns compared to its peers.
    • JPM's beta value of around 1 indicates a lower risk profile compared to WFC and C, suggesting that its stock price is less sensitive to market movements.
    • The recent trends suggest that JPM's volatility and beta are increasing, indicating that its risk profile may be changing. Investors should monitor these trends closely to assess the potential impact on JPM's future performance.
Peers Fundamentals(as of 2024-06-30)
Citigroup, Inc. (C)Wells Fargo & Co. (WFC)
  1. Market Position and Size:
    • JPMorgan Chase & Co. (JPM) is the largest player in the "Major Banks" industry, with a market cap significantly exceeding its peers, Wells Fargo & Co. (WFC) and Citigroup, Inc. (C). This size advantage translates into superior financial performance, with JPM generating significantly higher revenue and profits than WFC and C.
  2. Profitability and Efficiency:
    • JPM exhibits strong profitability, with a Net Profit Margin significantly higher than its peers and the industry average. This indicates superior efficiency in converting revenue into profit. Additionally, JPM's ROA and ROE are significantly higher than its peers and the industry average, suggesting efficient returns generation on its assets and equity.
  3. Financial Health and Stability:
    • JPM's liquidity position is strong, with a Current Ratio significantly higher than its peers and the industry average. However, its debt position is also high, with a Total Debt to Total Equity Ratio significantly exceeding its peers and the industry average. This suggests that JPM relies heavily on debt financing, which could pose a risk if interest rates rise or economic conditions deteriorate.
  4. Valuation and Market Perception:
    • JPM's valuation is generally higher than its peers and the industry average, suggesting that investors are willing to pay a premium for its earnings and book value. This premium valuation could be attributed to JPM's strong financial performance, dominant market position, and growth prospects. However, it's important to note that JPM's high debt levels could be a factor influencing its valuation.
  5. Cash Flow and Capital Management:
    • JPM's cash flow generation is strong compared to its peers, considering its significantly larger market cap. Its Net Operating Cash Flow and Free Cash Flow are higher than its peers, indicating that JPM is generating substantial cash from its operations and has low capital expenditures. This strong cash flow performance is a testament to JPM's efficient operations and capital allocation strategies.
  6. Growth and Future Prospect:
    • JPM's growth trends suggest that it is maintaining a strong competitive position in the market. Its consistent outperformance in sales revenue growth indicates that it is gaining market share and expanding its customer base. However, the volatility in its net income, basic earnings per share, and free cash flow growth suggests that JPM's profitability and cash flow generation are subject to fluctuations.
  7. Potential for Investment:
    • JPM's investment attractiveness is mixed. Its strong financial performance, dominant market position, and robust cash flow generation are positive factors. However, its high debt levels and volatile growth in key metrics are potential risks that investors should consider.
  8. Key Risks and Considerations:
    • JPM's high debt levels could pose a risk if interest rates rise or economic conditions deteriorate.
    • The volatility in JPM's growth in key metrics, such as net income, basic earnings per share, and free cash flow, suggests that its profitability and cash flow generation are subject to fluctuations.
    • JPM's revenue growth has not been consistently matched by corresponding profit growth, suggesting that its cost management and operational efficiency may need improvement.
  9. Overall Assessment:
    • JPMorgan Chase & Co. (JPM) is a financially strong company with a dominant market position, superior profitability, and efficient returns generation. Its liquidity position is also strong. However, its high debt levels and volatile growth in key metrics are potential areas of concern that investors should monitor. Overall, JPM is a well-managed company with a strong track record of performance, but its high debt levels and volatile growth could impact its future prospects.