Tuesday, February 26, 2013

JPM Investor Day 2013

So I listened to the JPM investor day via the internet today.  My internet connection, or the PC or something somewhere kept dropping out so I missed a lot, but that's OK.

Anyway, I know I do talk an awful lot about financials and banks.  That's partly because I do tend to have a sort of comfort level with financials (having been in the industry), they seem to still be hated (financially (many still believe financials are dangerous black boxes) and culturally (this popular hatred of banks seemed to have peaked out with Occupy Wall Street, but it's still pretty thick out there)), and they still seem cheap to me.  Not as cheap as in the fall of 2011 or at some points last year, but still cheap.

So that's why I talk a lot about them. If these things were trading at 3x book, I wouldn't talk about them (or maybe I would be looking for shorts).

This is not really a summary or recap of the investor day at all, but just some random thoughts that came to mind while I was listening.

Stock Price Performance
Anyway, there is one chart that I don't believe I've seen before.  Maybe it was in another presentation somewhere.  But I don't remember seeing it.  I do remember recently that Dimon said something about JPM stock; that even if you go back to the Bank One years JPM stock has outperformed other banks and even the S&P 500 index over time.

I sort of always wondered about this as I did own Bank One stock from way back when he first joined.  But this was never a 'hot' stock so my impression wasn't that it performed particularly well (of course, not bad considering how many banks lost most of their value).

So it was very interesting for me to see this page in their presentation:

This is pretty impressive.  It may be hard to see; you can go to the JPM website and actually look at the presentation slides if you want.   In the above charts, the blue line (I'm sure it's Chase blue) is JPM.  The little table at the top shows the annualized returns during the different periods.  I want you to see this so I'm going to actually retype this stuff out:

Annualized Returns
                        3/26/00 -            1/13/04 -              1/1/08 -              1/1/12-
                        2/19/13              2/19/13                 2/19/13              2/19/13
JPM*               +9.4%               +5.4%                 +4.8%                +46.5%
BKX                 -0.1%                 -3.3%                    -6.6%                +38.2%
S5FINL            -0.3%                 -2.6%                    -7.0%                +35.4%
SPX                 +1.9%                +5.6%                   +3.1%                +21.7%

*includes Bank One for 3/26/00 - 2/19/13 period

BKX is the KBW Bank Index, S5FINL is the S&P 500 Financials index, and SPX is of course the S&P 500 index.

March 26, 2000 is the day before Dimon became CEO of Bank One and January 13, 2004 is the day before JPM agreed to take over Bank One.

This is pretty impressive.  In March 2000, the S&P 500 index was close to it's high, so since then if you invested with Dimon, you would have outperformed the S&P 500 index by 7.5%/year.  That's a pretty big outperformance.  And you would have done even better against other bank stocks.

You know, this blog is getting very boring and predictable.  Any time I see a table like the above, I get tempted to do something. You know where this is going.  I have to add one more comp to the above table:

Annualized Returns
                              3/26/00 -             1/13/04 -             1/1/08 -             1/1/12-
                              2/19/13               2/19/13                2/19/13             2/19/13
JPM*                    +9.4%              +5.4%                  +4.8%               +46.5%
BRK-A                 +8.8%              +6.5%                  +2.6%                +28.2%
BKX                       -0.1%                -3.3%                   -6.6%                +38.2%
S5FINL                  -0.3%                 -2.6%                  -7.0%                +35.4%
SPX                       +1.9%                +5.6%                 +3.1%                +21.7%

Since March 2000, JPM has actually outperformed even Berkshire Hathaway!  That really is astounding.  Of course, we can argue about reinvested dividends (which may not be reinvested pretax, even though you can in an IRA) or some other factors.  But still, this is pretty crazy.  Even starting from right before the financial crisis in 2008, JPM has outperformed BRK +4.8%/year versus +2.6%/year.   I don't think anyone would have been able to predict that, given that it was a financial crisis driven by all the insane stuff that JPM was involved in (to a lesser extent than the less fortunate, or rather, less competent banks).

I don't mean to say JPM is a superior investment to BRK.  This comparison is just for fun.  They are different beasts with different risk profiles.  But then again, it's not hard to understand why even Buffett personally owns (or at least until recently) a million shares of JPM.

The Usual Chart
And here is the usual chart that I like showing the growth of book value of JPM:

Bank Value per Share and Tangible Book Value per Share Growth
Tangible book value per share has grown 15% in 2012, an average of 12%/year over five years and 9%/year over 10 years.

JPM closed today at $47.60/share, so it's still trading at 1.2x tangible book value.  This is still very attractive.  Of course, 1.0x tangible book is Dimon's "very conservative" valuation for JPM where it's a no-brainer to buy back stock.  He feels that JPM can earn at least 15% return on tangible book, so that makes perfect sense.  With a 15% return on tangible book being what they can do "at least", then 1.5x tangible book is not an aggressive valuation at all, I don't think.

How to Make 40% by Year-end 2013 (or 23%/year in Three Years)
So even today, JPM is easily worth $58/share ($38.75 x 1.5).  That's 22% higher than the current price.  If tangible book grows 15% again this year, then 1.5x year-end tangible book would take the stock price up to $67.   That would be a 41% return through the end of 2013.

If JPM keeps earning 15% on tangible equity over the next three years, TBPS grows 12%/year (less than tangible ROE due to dividends paid) and the stock price gets up to 1.5x tangible book, JPM would be a $82/share stock.  That's 20%/year over the next three years and with dividends at the current dividend yield, that would come to 23%/year.  Not too bad. 

And keep in mind that this is based on the "at least 15% return on tangible equity", so this may be conservative. It is certainly possible that things can get much better as the world 'normalizes'.    How many large cap stocks project 20%+ returns?

Line of Business ROE
Here's a table of the through-the-cycle ROE targets for the various business lines.  As they have been saying, if current elevated expenses (legal expense etc...) normalize, they can earn $24 billion net as is (without assuming growth or improvement in the environment).

The $24 billion net income is before preferred divideds and other distributions to participating securities, and that comes to around $1.4 billion, so net to common would come to $22.6 billion.  With 3.8 billion shares outstanding, that's around $6.00/share in EPS, and 10x that is $60/share.

Not surprisingly, that comes to 1.5x tangible book value per share.

Anyway, the earnings walk below shows how JPM can get to $27.5 billion in net earnings just from certain items normalizing.

You will notice that if you take out the $3.5 billion in growth initiatives, you will get the $24 billion that has often been mentioned.  I think that is what they would earn when things settle down.  I notice in this chart, though, that there is $1.3 billion earnings improvement on an assumed 100 bps increase in interest rates.  My impression was that the $24 billion they used to talk about didn't assume any increase in rates.  The forward curve does imply rising rates, so that may be where that comes from. 

There is no timetable set for this $27.5 billion to be achieved.  This 'significant' items are expected to go down over time (as well as the litigation expense), and the growth intitiatives will kick in over time too. 

But during the Q&A when someone asked about this $27.5 billion figure, Dimon said that there is no time-table but it can come soon too; he noted that the investment bank is doing better than expected, so other areas might too.

The key is that the earnings power of $27.5 billion is there now (or will soon be in place with ongoing growth intitiatives).  And this doesn't include any growth over time from improvement in the environment.

For example, Dimon said that the investment banking business will see demand double in the next ten years and triple in emerging markets (or something like that).  If JPM just keeps up, they can really grow.

If you flip through the slides, you'll realize that JPM really is a growth business.  This may not really be recognized.

Don't Break Us Up!
OK, nobody said that.  But there were some slides today that sort of focused on synergies/cross sell to show the benefit of JPM being a large diversified business that it is.  This is obviously on the minds of senior management at JPM, and they seem to be getting ready for the debate (where shareholders and/or regulators/government might demand they be broken up). 

Here are some slides.

This is from the overview presentation:

...and this is from the Asset Management presentation:

...and this from the Commercial Banking:

Anyway, I thought it was a good presentation.  JPM seems to be doing well and growing in many areas.  A lot of this doesn't show up yet due to all sorts of recent events, but it seems like it will soon when things turn.

Even without a turn in the environment, they have been doing very well earning record profits.  You don't need heroic assumptions to get 20%/year out of this stock (12% tangible BPS growth, 1.5x tangible BPS valuation etc...), so it looks like a solid stock to own.

Like WFC, this is a company that has grown and benefitted from bad times, so I wouldn't worry too much about bad times.  Maybe we want bad times so they can grow even more.

The stock seems to have done well over time, even outperforming Berkshire Hathaway, and it's still pretty cheap.  That's kind of rare.

(But then again, this is a bank stock so be aware that even if the business does well and benefits from another crisis, the stock market will probably not agree; this can get volatile so beware!  I tend to like highly focused portfolios, like Greenblatt, Buffett and Munger advocate. But remember, even Greenblatt said that if you own 5-8 stocks, they have to be different industries.  Owning 8 banks stocks as your whole portfolio is not going to work.)


  1. I enjoy your insights - thanks for sharing. Just out of curiosity, do you own JPM?

    1. Hi,

      Thanks. I do own a bunch right now. I've owned some for a very long time (since Dimon joined Bank One), but it has always been a small, token position. It was never particularly cheap to me. This changed during the crisis and I bought a bunch in late 2008 early 2009. Then I lightened up after it recovered.

      And then in late 2011 it started looking cheap again so I loaded up and last year too.

      I do intend to lighten up when it gets to a more reasonable valuation but would still probably continue to hold at least a token position even at fair value.

      Thanks for reading.

    2. Hi,

      I tried to check this out on my own but it wasn't clear: did Buffett sell his private JPM holdings? It seems like you were hinting that. Thanks

    3. Hi,

      Oh no, I wasn't trying to hint that, actually. I just remember he said he owned a million shares in a interview on TV last year, I think.

      I think he said that the whale loss hasn't changed his views on Dimon and JPM implying that he will hold the shares despite that loss.

      Since then, I don't believe anything has really happened to make him want to sell the shares.

      If he does sell, I would imagine it would be at much higher prices.

      Thanks for reading.

  2. Hi Have you considered JPM warrants as a vehicle to maximise your return?

    If your view is for the bank to achieve that level of return, it seems that the warrants are the way to take advantage of this situation?

    I really enjoy reading your posts

    Best regards


    1. Hi,

      Yes, these banks have TARP warrants outstanding. I did't mention that. You can buy the warrants, or use LEAPs too for sure.

      Thanks for reading.

  3. when you say that JPM outperformed since 2000, what exactly are you talking about? not the share price for sure

    1. Hi,

      Thanks for asking. Actually, it would be more accurate to say that Dimon outperformed since 2000. For the period between 2000-2004, the stock price of Bank One is used, and then after ONE is merged into JPM, the JPM stock price is tracked. So it's the return you would have gotten if you bought Bank One stock when Dimon joined.

      If you look just at the current JPM stock going back, the results will show the old JPM before 2004.

  4. Thought you'd appreciate this. Buffett talks about looking at bank earnings and not bank book values; sounds like he's not too excited about BAC and C, and isn't shocked that they are trading below tangible book.


  5. Hi,

    Thanks, I did see that and I agree with him. I was surprised last year when it says book value isn't important. This made no sense as he really like ROE as a measure of performance, but now seeing this segment it's clear to me that what he meant was that the p/b ratio is not important in evaluating banks.

    He says if a bank earns high returns on tangible assets, it will trade at a high price to tangible book ratio and if the return is below one, it will trade at less than tangible book or something like that.

    And that makes perfect sense. You always year people saying that this or that bank is cheap because it's at 0.5x book, but it doesn't matter if that bank earns an ROE of 3% or 5%. It's not a cheap stock at all.

    So in that sense, what's more important is earnings when valuing banks, not book value.

    In the above JPM case, first we establish that it can earn at least 15%/year, and only after getting comfortable with that do we then say JPM is worth 1.5x tangible book.

    As for BAC, he sees it being worth much more in 8-9 years.

  6. Im not a big fan of banks JPMorgan chase or any banking stock for that matter. Its really hard to figure out what a bank owns. Many investors may be unaware that their are warrants that trade on all of the major banks including JP Morgan. The warrants were issued to the governmant by the banks in exchange for the bailout assistance. The tarp warrants trade for pennies on the dollar and they do not expire until late 2018. You could get the same amount of gains or much greater gains buying the tarp warrants than you would get buying the stock for just a small fraction of the amount of money that it would take to buy the stock. That is if the large money center banks perform well over the next five years.

    1. that's assuming your big and important enough where your PB will find you some to buy.

    2. The warrants are publicly traded. No need for a PB.