KBW analyst David Conrad on Tuesday said that JPMorgan Chase could be broken up if stock price multiples remain low over the long term.
Konrad said that his firm did not think that JPMorgan CEO James Dimon was “going anywhere soon,” in the wake of the company's $2 billion second-quarter hedge and its suspension of its share buyback program, but that “should the market continue to depress the multiples of universal banks regardless of underlying values, we believe the board may explore options to unlock value.”
The analyst added that “contrary to public opinion, that JPM provides less regulatory risk to the system as a consolidated company than broken up.”
As of Tuesday’s market close, JPMorgan Chase and two other universal banks traded at historically low multiples to tangible book value and forward earnings estimates:
JPMorgan’s shares closed at $34.01, returning 4 percent year-to-date, following a 20 percent decline during 2011. The shares have fallen 17 percent since Dimon announced the trading loss after the market close on May 10. The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight and for six times the consensus 2013 earnings estimate of $5.48. The consensus 2012 earnings per share estimate is $4.45.
Shares of Citigroup closed at $26.92, returning 2 percent year-to-date, following last year’s 44 percent decline. The shares trade for just over half their tangible book value, and for six times the consensus 2013 earnings per share estimate of $4.70. The consensus 2012 earnings per share estimate is $4.16.
Shares of Bank of America closed at $6.98, returning 26 percent year-to-date, after dropping 58 percent last year. The shares trade for 0.6 times tangible book value, and for seven times the consensus 2013 earnings per share estimate of $1.05. The consensus 2012 earnings per share estimate is 61 cents.
Konrad said that JPMorgan’s hedge trading loss was “very disappointing, and we believe the lack of management oversight and unintended risks are likely to cause reputational damage for the company over the next few years.”
To reflect “risk for further volatility of this trade, projected lower revenues from the [company’s chief investment office] in 2013 and lower buyback assumptions, the analyst lowered his 2012 earnings estimate for JPMorgan Chase to $4.46 from $4.60 and his 2013 earnings per share estimate to $5.65 from $5.90, and estimated “$4.2 billion of trading losses partly offset by $1.9 billion in securities gains” over the next two quarters, while stating that “JPM currently has $8.5 billion in unrealized gains.”
Konrad maintained his “buy” rating for JPMorgan Chase, while lowering his price target for the shares to $49 from $55, “or approximately 1.2x [forward tangible book value].”
KBW forecasts “a return on tangible common equity (ROTCE) of 15 percent in 2013, which is well above its cost of equity,” but if the market fails to reward strong earnings performance shareholders may push the company’s board of directors to act.
Konrad said that “after analyzing several scenarios, we believe that spinning out retail financial services (RFS) and cards into an independent Chase brand may create approximately 50 percent in shareholder value from [the] current price.”
—By TheStreet.com’s Philip van Doorn
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