JPM1

JPMorgan Chase & Co. Stock Analysis

Table of Contents

Company Description:.................................................................................................................................3

Company Analysis:.......................................................................................................................................4

Company Strategy:..................................................................................................................................4

Company Management:..........................................................................................................................4

Business...................................................................................................................................................5

Porter’s Analysis......................................................................................................................................6

Stock Price Performance:............................................................................................................................7

Total Return Analysis:..................................................................................................................................7

Dividend Policy:...........................................................................................................................................8

Financial Analysis:........................................................................................................................................8

Key Ratio Analysis........................................................................................................................................9

Valuation Analysis.....................................................................................................................................10

Analyst ratings...........................................................................................................................................10

Portfolio analysis.......................................................................................................................................10

Risk Factors................................................................................................................................................11

Pros and Cons:...........................................................................................................................................12

Conclusion.................................................................................................................................................12

Bibliography...............................................................................................................................................13

APPENDIX..................................................................................................................................................14

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Company Description:

JPMorgan Chase & Co., herein referred to as JFM, is one of the oldest financial

institutions in the United States. It is a leading global financial services firm with assets of $2

trillion operating in more than 60 countries. It is a leader in investment banking, financial

services for consumers, small business and commercial banking, financial transaction

processing, asset management and private equity. It is in the other diversified financial services

industry and is listed within financial sector ((S&P 500).

JPMorgan Chase’s principal bank subsidiaries are JPMorgan Chase Bank, National

Association (“JPMorgan Chase Bank, N.A.”), a national bank with branches in 23 states in the

U.S.; and Chase Bank USA, National Association (“Chase Bank USA, N.A.”), a national credit

card issuing bank. JPMorgan Chase’s principal nonbank subsidiary is J.P. Morgan Securities

Inc., an investment banking firm.

. JPM’s major competitors are Bank of America Corporation (BAC) and Citigroup Inc (C)

JPM’s current price is $53.86 (Yahoo March 22, 2010) with the 52-week range of $17.25 -

$55.20. JPM paid dividends of $0.20 on June 1st 2010. The number of shares outstanding is

469,135,000 with 2.87% held by all insiders and 65.8% held by institutional and mutual fund

owners (Yahoo Finance).

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Company Analysis:

Company Strategy:

The company plans to continue to grow its sales force in the RFS (Retail Financial Services)

segment through adding personal bankers and specialists that include loan officers, investment

sales representatives and small business relationship managers. With rising expectations of

continued weakness in its subprime mortgage business, JPM may use the downturn in the

subprime market as an opportunity to purchase underpriced assets. A healthy pipeline of M&A

activity will help boost growth in the investment banking business.

These focused points along with the continued integration and rebranding of Bank One

will help JPM maintain healthy banking fundamentals and good earnings growth.

Company Management:

JPM was founded in 1823 and incorporated at Delaware. The total number of employees and

stock holders are 222,316 and 233,559 respectively.

JPMorgan Chase & Co.’s Governance Risk Indicator (GRI) as of Oct 1, 2010 is:

Board low risk

Audit low risk

Compensation low risk

Shareholder

rights low risk

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As of October 2009, JPMorgan Chase's Corporate Governance Quotient (CGQ®) is better than

84.7% of S&P 500 companies and 97.6% of companies in diversified financials industry. The

insider ownership of shares is 0.45% and the institutional ownership is 74.9%.

Business:

JPM has six business segments. Here is a snapshot of business segments and their functions:

Investment Bank (IB): IB offers a full range of investment banking products and services in all

major capital markets, including advising on corporate strategy and structure, capital-raising in

equity and debt markets, sophisticated risk management, market-making in cash securities and

derivative instruments, prime brokerage, and research.

Retail Financial Services (RFS): RFS includes the Retail Banking and Consumer Lending

businesses, serves consumers and businesses through personal service at the bank branches and

through ATMs, online banking and telephone banking, as well as through auto dealerships and

school financial-aid offices.

Credit Card Services (CS): CS is one of the nation’s largest credit card issuers, with more than

145 million credit cards in circulation and over $163 billion in managed loans.

Commercial Banking (CB):

CB serves nearly 25,000 clients nationally, including corporations, municipalities, financial

institutions and not-for-profit entities with annual revenue generally ranging from $10 million to

$2 billion, and more than 30,000 real estate investors/owners.

Treasury & Securities Services (TSS):

TSS is a global leader in transaction, investment and information services. TSS is one of the

world’s largest cash management providers and a leading global custodian. Treasury Services

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(“TS”) provides cash management, trade, wholesale card and liquidity products and services to

small and mid-sized companies, multinational corporations, financial institutions and

government entities

Asset Management (AM):

AM offers global investment management in equities, fixed income, real estate, hedge funds,

private equity and liquidity products, including money-market instruments and bank deposits.

Porter’s Analysis

Competitive Rivalry:

JPM has been facing a high degree of competitive rivalry due to having operations in more than

60 countries globally and regionally.

Threat of New Entrants:

The industry in which JPM operates places much emphasis on service quality and also the

information systems. Deploying reliable information systems and maintaining high levels of

service quality can cost a hefty price which deters the entry of new competitors.

Threat of Substitute Products:

Customers may find using traditional face-to-face banking with the banking personnel less

expensive rather than employing the new services offered by JPM.

Bargaining Power of Suppliers and Customers:

The bargaining power of customers is high as there are a large number of competitors in the

industry. The customers have wide variety of choices in financial services. The bargaining power

of suppliers is low as the company focuses on maintaining good supplier relations through

Supply Diversity Networks (SDN).

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Stock Price Performance:

The current stock price is $39.65 (Yahoo! Finance). In the five-year period, the stock has

been outperforming S&P 500 from 2006, as can be seen in Chart 1 (TAB C). As shown in Chart

2, in the last one year, JPM has underperformed S&P 500.

As shown in Chart 3, the current price of stock is greater than 50-day moving average. This

suggests that an uptrend in the stock price can be expected.

JPM’s price change in the past 3 months is 9.1%, which is less than that of industry group

(33.5%). According to Value Line, JPM’s Beta of 1.13 is lower than its industry Beta of 1.8.

JPM’s risk of 154 is less than 169 of Citigroup and 166 of Bank of American Corp.

As shown in Chart 4 (TAB C), 70% of the tickers in US Markets are riskier than JPM (Risk

Grade). It means that JPM is less risky than the majority of companies in its industry.

JPM’s estimated price for one year is $53.14 (Yahoo! Finance) and the estimated price for

five years is $75 (Value Line). According to valuation using current multiple (P/E) shown in

Table 3 (TAB B), the price is expected to increase by 7.73% in 2010 and 37% in 2011. As shown

in Table 4 (TAB B), the industry's current multiple (P/E) valuation shows that the growth is

60.92% in 2010 and 76.26% in 2011.

Total Return Analysis:

Chart 5 (TAB C) and Table 6 (TAB B) compare the five-year cumulative total return for JPM

with the cumulative returns of the S&P 500 Stock Index and the S&P Financial Index. Chart 5

(TAB C) and Table 6 (TAB B)assume simultaneous investments of $100 on December 31, 2004,

in JPMorgan Chase common stock and in each of the above S&P indices. The comparison

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assumes that all dividends are reinvested. As shown in Chart 5 (TAB C)., the returns of JPM has

outperformed S&P 500 and S&P 500 Financial index in 2008 and 2009.

As shown in Table 8 (TAB B), the total returns of JPM are more than that of S&P 500 for the

period of three, five, 10 and 15 years.

Dividend Policy:

JPM paid $0.05 dividends on July 31st 2010. Early in 2009, JPM cut the annual dividends

from $1.52 to $0.20 per share. This drastic move is premised on the need to be prepared for a

prolonged and potentially terrible economy. As shown in Table 9 (TAB B), the dividend yield is

4.8% in 2008 and 1.27% in 2009. The dividend payout ratio is 186.215 in 2008 and 9.427 in

2009. According to Value Line, dividend will increase up to $1.20 and dividend yield will

increase to 2.2 % during 2012-2014.

Financial Analysis:

As per Standard & Poor’s, the long term issuer credit rating for JPM is A+ and short

term issuer credit rating is A1 (Extremely Strong).

The financial statements are located in TAB A in the appendix. From the statement of

cash flows, it can be observed that total cash flows from operations remain positive and

increased from 2008 to 2009. JPM has reported net income of $11.7 billion, or $2.26 per share,

in 2009, compared with net income of $5.6 billion, or $1.35 per share, in 2008. Total net revenue

in 2009 is $100.4 billion, compared with $67.3 billion in 2008. Return on common equity is 6%

in 2009 and 4% in 2008.

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The increase in net income for the year was driven by record net revenue, including

record revenue in the investment banking segment which reflects modest net gains on legacy

leveraged-lending and mortgage-related positions compared with net markdowns in the prior

year.

Table 5 (TAB B) shows that the net income, operating margin and quarterly revenue

growth of JPM are greater than those of its competitors and its industry.

As per the Value Line, the net income is expected to increase to $59 billion by 2015. As

per Value Line, company’s financial strength is rated as “A”.

Key Ratio Analysis

As shown in Table 10 (TAB B), the ROA, ROI, ROE and five year sales growth and five

year earnings per share growth rate are decreased in 2008 due to economic downturn and

witnessed an increase in 2009. As per Value Line, these ratios are expected to grow indicating a

good performance during 2011 to 2015.

As shown in Table 11 (TAB B), the P/E ratio of JPM is less than that of its industry. The

return on equity of JPM is 6.307% which is higher than 2.321% of its industry. This indicates

that JPM is better off in generating profit with the money shareholders have invested. JPM

reported earnings per share of $ 3.39 are higher than $ 0.74 of its industry indicating that JPM

has better profitability.

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Valuation Analysis

To evaluate the JPM price, there are four valuation models inclusive of free cash flow to

the firm, free cash flow to equity, dividend target discount model, and residual income model.

Based on the data from Value Line and Eval including Beta, long term debt, long term interest,

number of shares, magic number, etc, WACC (cost of capital) is 8.7% and the required return

was found to be 13.07% (Table 7 in TAB B). The stock price in FCFF model was $183.89 per

share, the FCFE model valuation was $49.82 per share, and the DDM model valuation was $8.33

per share (table 7). The average price over 5 years target is $80.51 per share while the current

price of $38.06. According to Value Line, the price is expected to reach $75 per share in five

years.

Analyst ratings

Analyst RatingS&P 500 Strong Buy

Money central Strong Buy – Moderate BuyYahoo! Finance Strong Buy – Moderate BuyReuters Buy

Portfolio analysis

The portfolio of Student Managed Investment Fund (SMIF) currently contains stocks

from insurance industry and other financial services industry. The fund recommended allocation

for the financial sector is 11.3% in 2010. S&P 500 index reveals 13.2% of the total portfolio

should be allocated to the financial sector. Investing in JPM will help to diversify the portfolio

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and decrease the risk for SMIF. Moreover, this is the potential company and will benefit the

fund.

Risk Factors

Here are the risk factors that could materially affect the financial condition and

operations of JPM.

1. International financial market and economic conditions: JPM’s businesses have

been, and in the future will continue to be, materially affected by economic and

market conditions, including factors such as the liquidity of the global financial

markets, the level and volatility of debt and equity prices, interest rates and currency ,

investor sentiment, inflation acts of war or terrorism and recessionary pressures.

2. Financial condition of clients and customers: JPM routinely executes transactions

with counterparties in the financial services industry, including brokers and dealers,

commercial banks, investment banks, mutual and hedge funds, and other institutional

clients. Many of these transactions expose it to credit risk in the event of default by

the counterparty or client.

3. Regulations and environmental risks: JPM has also invested in companies engaged

in wind energy and in sourcing, developing and trading emission reduction credits. As

a result of these activities, it is subject to extensive and evolving energy,

commodities, environmental, and other governmental laws and regulations. It may

incur substantial costs in complying with current or future laws and regulations. The

failure to comply with these laws and regulations may result in substantial civil and

criminal fines and penalties.

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Pros and Cons:

Pros:

1. Less risky than its industry and competitors

2. Strong financials

3. High recovery potential

4. Good projections of rise in earnings by Yahoo! Finance, Value Line.

5. Excellent analyst ratings ( Strong buy )

Cons:

1. Largely dependent on the international financial markets and economic conditions

2. Risk of regulations and environmental conditions

3. Higher debt ratio compared to that its industry

Conclusion

The analysis of JPM showed it to have a low Beta value indicating that it is less risky

than its industry. The recommendations from ValueLine.com, Yahoo! Finance and different

analysts suggest that the stock has good prospects for the rest of 2010 and 2011. The stock price

and earnings are estimated to increase in next four years. Based on the above analysis, it is

recommended to invest 3% of the Student Managed Investment Fund in JPM.

.

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Bibliography

1. Investopedia. http://www.investopedia.com/terms/

2. Yahoo Finance. http://www.finance.yahoo.com

3. Google Finance. http://www.finance.google.com

4. Wikipedia. http://www.wikipedia.org/wiki/AmericanExpress

5. Nasdaq. http://www.nasdaq.com

6. ValueLine. http://valueline.com/

7. Sector Spdr http://www.sectorspdr.com/shared/pdf/sectorResearch/XLFaltavista.pdf

8. Industry survey http://emi.compustat.com/cgi-irwinus-doc/docserver.cgi?

keytype=INDSUR&keyval=ILH&doctype=IS&docformat=pdf&date=200910&ie=.pdf

9. Company 10-K reports

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APPENDIX

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TAB A

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TAB B

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TAB C

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TAB D

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TAB E

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Table 1: Key ratio comparison

Stock P/EROE %

Div. Yield % EPS

JPM 11.73 6.307 1.272 3.39BAC (51.9)(N/A) (1.321) 0.266 -0.3C N/A (7.89) 0.302 -0.3

Table 3: Valuation using current multiple (P/E):

Fiscal Year

   Est Low/High Price Range

   Avg. Est. Price

   % Change for Average

Dec-10 33.93-47.62 42.71 7.73%

Dec-11 46.80-61.78 54.29 36.95%

Table 4: Valuation using the industry's current multiple (P/E)

Fiscal Year Est. Price % ChangeDec-10 36.14 -8.84%Dec-11 45.94 15.88%

Table 5: Direct competitor comparison

Direct Competitor Comparison JPM BAC C IndustryMarket Cap: 157.60B 136.86B 120.24B 13.06BEmployees: 232,939 283,000 259,000 30.71K

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Qtrly Rev Growth (yoy): 23.60% 8.50% -10.90% 17.00%Revenue (ttm): 88.00B 72.51B 48.53B 4.42BGross Margin (ttm): N/A N/A N/A 0.00%EBITDA (ttm): N/A N/A N/A N/AOperating Margin (ttm): 42.66% 12.10% -1.17% 33.75%Net Income (ttm): 13.44B -2.00B -3.90B N/AEPS (ttm): 3.39 -0.2 -0.17 0.74P/E (ttm): 11.71 N/A N/A 15.07PEG (5 yr expected): 1.34 1.4 0.41 1.24P/S (ttm): 1.79 1.88 2.47 2.41

Table 6: Returns analysis

JPMorgan Chase

S&P Financial Index

S&P 500 Index

2004 100 100 1002005 105.68 106.48 104.912006 132.54 126.91 121.482007 123.12 103.27 128.162008 91.84 46.14 80.742009 123.15 54.09 102.11

Table 7: JPM valuation analysis

WACC 0.087302CAPM Calculation 0.13075Value/share based on FCFF Model $183.39Value/share based on FCFE Model $49.82Value/share based on DDM Model $8.33CFROI Analysis (Refer Appendix – TAB E) -0.38%Residual Income Model (Refer Appendix – TAB D) $40.65Recommended 5-Year Target Price $80.51

Table 8: Total returns analysis

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Total Return % YTD 1-Year 3-Year 5-Year 10-Year 15-YearJPM -4.39 -9.04 -4.16 5.97 1.48 6.84S&P 500 5.68 13.84 -7.27 1.51 -0.26 6.59

Table 9 : Dividends Analysis

JPMORGAN CHASE & CO

  Dec09 Dec08 Dec07 Dec06 Dec05

Earnings Yield 5.609 2.570 10.453 8.161 6.121

Dividend Yield 1.272 4.821 3.299 2.816 3.427

Relative Dividend Yield 63.304 152.166 161.375 146.265 177.298

Dividend Payout Ratio 9.427 186.215 33.615 35.617 57.037

Table 10: Key ratio analysis 2005-2009

.

2009 2008 2007 2006 2005P/E Ratio 18.520 36.663 9.678 12.290 16.333

Price/Sales 1.421 1.160 1.263 1.684 1.732

ROA 0.438 0.162 1.055 1.070 0.719

ROI 2.314 0.872 5.847 6.147 4.169

ROE 6.307 2.343 12.857 12.245 7.976 5-yr Sales Growth 18.440 15.120 19.240 16.160 10.610 5-yr EPS Growth 7.830 (15.810) 40.500 38.250 (3.610)

Table 11: Key ratio analysis of industry and competitors

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Stock P/EROE %

Div. Yield % EPS

JPM 11.73 6.307 1.272 3.39BAC (51.9)(N/A) -1.321 0.266 -0.3C N/A -7.89 0.302 -0.3Industry 15.07 2.321 1.122 0.74

Chart 1: Stock price analysis of JPM for five years

Chart 2: Stock price analysis of JPM for one year

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Chart 3: Moving average

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Chart 4: Risk Ranking

Chart 5:

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