How JPMorgan's $5.8 Billion Profit Turned Into Jamie Dimon's First Loss

Following stocks' second-best day of 2013 on news of a Republican proposal to extend the debt ceiling to Nov. 22, the market appears to be (sensibly) adopting a wait-and-see approach this morning. A proposal is a step in the right direction, but it remains to be negotiated and passed into law. The S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) are up just 0.09% and 0.18%, respectively, as of 1:15 a.m. EDT.

One Dow component, JPMorgan Chase (NYSE: JPM  ) , substantially outperformed the broad market and its peers yesterday, notching a 3.5% gain. That outperformance is continuing this morning, despite the bank's reporting a third-quarter loss of $0.17 per share -- its first such loss since the second quarter of 2004 and the first under the leadership of CEO Jamie Dimon.

It is a measure of the bank's legal woes that, excluding litigation expenses and other special items, the bank earned a $5.8 billion profit, or $1.42 per share. The latter figure represents less than a 2% year-on-year increase, but it compares favorably with the $1.19 per share analysts were looking for.

Legal expenses in the third quarter added up to $9.2 billion ($7.2 billion after taxes), part of which represents reserves against future settlements. In aggregate, JPMorgan has now reserved a whopping $23 billion to cover settlements, fines, and other legal expenses. That figure encapsulates how the bank went from golden child, sailing unscathed through the financial crisis, to lightning rod for regulatory and legal action.

Despite this, JPMorgan remains highly regarded on Wall Street. According to data from First Call, 24 of the 31 analysts who cover the stock rate it either a "strong buy" or a "buy," another six rate it a "hold," and just one deems it an "underperform" call. Now, we know that stock analysts are inherently bullish, but, as an article published yesterday by The Street points out:

All that adds up to a rating of 4.4 out of 5 for JPMorgan, according to Bloomberg's scoring system. That is the best among JPMorgan's major U.S. peers, including Wells Fargo, Bank of America, Citigroup, Morgan Stanley and Goldman Sachs. Citigroup is close behind with a 4.34 rating, while Goldman comes in last of those six with a score of 3.32.

That observation lies in sharp contrast to the lack of consideration the market is showing JPMorgan's shares. As the following table shows, the valuations they command put them at the bottom of their peer group:

Company

Price/Tangible Book Value

Forward P/E (next 12 months' EPS)

Bank of America

1.1

12.3

Morgan Stanley

1.1

12.2

Goldman Sachs

1.1

10.9

Wells Fargo

1.9

10.7

Citigroup

0.9

9.7

JPMorgan Chase

0.8

9.2

Source: S&P Capital IQ.

JPMorgan has faced dreadful headline risk ever since last year's "London Whale" trading fiasco, but that will pass. Ultimately, I think investors with a multiyear time horizon stand to earn acceptable returns on the stock.

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