Why JPMorgan Chase Is a Buy Right Now

American banking giant JPMorgan Chase (NYSE: JPM  ) is showing remarkable improvements in performance across business lines. It has beaten analysts' estimates by reporting net income of $5.4 billion in its second quarter, a 13% jump over the prior year. Does it deserve a spot in your portfolio?

Performance
The company managed to reduce its credit-card loan-loss reserves by $1 billion, and its investment-banking segment posted strong earnings and client flows. Last year, JPMorgan Chase's earnings got a boost from the release of $7 billion in reserves back into income, enabling it to report record high earnings of $17.4 billion, the highest among U.S banks. But Foolish investors should keep in mind that while improving credit quality is a good thing, a bank can't sustain earnings indefinitely by releasing provisions.

As savvy investors, we need to look at earnings and beyond to decide whether a stock is worth investing in. Let's narrow things down by comparing the company and its closest peers against a few important parameters:

  • The price-to-earnings ratio: This ratio helps us to look at a company's earnings relative to its price and determine how cheap or expensive the stock is.
  • The price-to-book (P/B) ratio: Widely linked with value investing and a relevant metric for banks and other asset-heavy companies, P/B gives us a clear idea about a stock's value and indicates value opportunities.
  • The tier 1 capital ratio: This metric, dividing the core equity capital by the bank's total risk-weighted assets, is a crucial ratio for measuring a bank's capital adequacy and its ability to stay afloat during bad times.
  • The dividend yield: A stream of dividends can act like a cushion during market downturns. This metric shows how much a company is paying out relative to its price.

Take a look at the following metrics to get a better understanding of how JPMorgan Chase fares in terms of valuation, when compared with other U.S. banking giants.

Company

P/E
(TTM)

P/B

Tier 1 Capital Ratio

Dividend Yield

JPMorgan Chase 7.8 0.82 12.4 2.7%
Wells Fargo (NYSE: WFC  ) 9.6 1.04 11.7 1.9%
Bank of America (NYSE: BAC  ) 6.0* 0.37 11.0 0.5%
Citigroup (NYSE: C  ) 9.1 0.49 13.6 0.1%

Source: Capital IQ, a division of Standard & Poor's.
*Forward earnings.

JPMorgan Chase offers the best combination of value and quality. While Bank of America and Citigroup might seem cheaper, their operations are of somewhat lower quality than Wells and JPMorganChase. JPMorgan Chase, however, trades at fairly distressed prices. On top of all that, the bank offers a significantly higher dividend yield than its competitors do.

Plus, the bank's general health is improving. Over the past year, its credit quality continued to improve as net charge-offs, delinquencies, and non-performing loans declined considerably. And there was that reduction in its credit-card loan-loss reserves as estimated losses declined.

The Foolish bottom line
With strong earnings and a compelling valuation, JPMorgan Chase looks like an attractive option. If you're thinking of going for big banking stocks, this bank might deserve a spot in your portfolio.

Add JPMorgan Chase to your stock watchlist.

Fool contributor Zeeshan Siddique owns none of the stocks mentioned in the article. The Motley Fool owns shares of JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2011, at 3:29 PM, ronbeasley wrote:

    That's a very superficial analysis. Take a look at Wells Fargo's slide presentations from its last conference calls. Wells outperforms JPM and all other banks on virtually every metric that matters - cost of funds, net interest margin, credit quality, and so on. It also has a much more diverse revenue base, and far lower liabilities for litigation and mortgage putbacks. Which is why Warren Buffett owns enormous amounts of Wells, and not JPM.

    Ron Beasley

    www.rwbi.net

  • Report this Comment On August 21, 2011, at 10:27 AM, YoungMoney1234 wrote:

    Although I do agree with Ron on a few items listed above JPM is the clearing house for America. They have limited exposure to Europe and have lots of room for growth. A leading global custodian, J.P. Morgan has over $16.9 trillion in assets under custody. Last quarter JPM had an amazing results. They made money on 127 trades out of 129. JPM is a powerhouse that is ready to rock. They will be the biggest US bank (ranked by assets) very soon. Stick with JPM not WFC. You will not regret it.

  • Report this Comment On August 21, 2011, at 7:48 PM, Seanickson wrote:

    JPM has a tremendous amount of intangibles included in its book value, if you take away both JPMs and WFCs intangibles you'll have respective p/b values of about 1.14 and 1.11, almost identical. The lower P/E is definitely a plus for JPM, however I'd put my money on the more diverse wells fargo

  • Report this Comment On August 21, 2011, at 8:08 PM, mort5506 wrote:

    Just out of curiosity, what ever came out of JP Morgan being investigated for silver manipulation, and them holding more options than physical silver available to them. If these allegations proved true and people started cashing in on the options what would that do for their stock?

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