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Which is the better stock to purchase today: JPM or BAC?


Viking
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Which is the better stock to purchase today: BAC or JPM? (assuming 24 to 36 month holding period)

 

Both stocks are 'cheap'. JPM looks cheaper and to be the 'safer' purchase. JPM has already turned the corner. Earnings are growing. Cash return is happening (dividend and stock buybacks). TBV has been growing nicely for a couple of years. Management is strong. Their business the next few years (revenue, earnings and growth in TBV) looks fairly predictable.

 

BAC looks like it may just now be turning the corner with earnings mostly flowing to the bottom line (and not getting eaten up by settlements or write downs). Dividend should increase and perhaps we will see stock buybacks. TBV should start to grow nicely. Management is OK. However, it is not as easy to predict revenue, earnings and growth in TBV over the next few years (are more large one time charges coming?).

 

JPM      2014  2013.        BAC.    2014.    2013

 

ROE.      10%    9%.                    1.7%.  4.62%

ROA        .89    .75                      .23.      .53

TBV.  $44.69  $40.81                $14.43  $13.79

Div.    $1.60.  $1.52                  $0.20    $0.05

NI.      $21.7    $17.9                    $4.8.  $11.4

E/sh.  $5.29    $4.35                  $0.36.  $0.90

 

Expected earnings in 2015: JPM $5.75.      BAC $1.40

Share price                            $55.50            $15.50

PE.                                          9.65              11.1

Price to TBV.                            1.25.              1.08

 

Expected earnings in 2016: JPM $6.44 (13% growth)  BAC $1.66 (18% growth)

 

Which one do you like more and why?

 

                         

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Scott, I have been purchasing both, but much more BAC than JPM. My concern with BAC is if we get a few more skeletons coming out of the closet this year slowing earnings and BV growth. BAC is selling at more of a discount to TBV than JPM so if we get somewhat clean earnings this year then the stock should have more upside looking out 12 to 18 months. One of the concerns with JPM currently is meeting the new capital rules will use up a chunk of earnings the next few years and limit how much the company can return to shareholders (via div and share repurchases).

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I'm reading a book on bank M&A and JPM is used as an example repeatedly of what a bank with bad internal controls looks like and the consequences therein.

 

I would say yours is the interesting perspective. What's the book and can you elaborate.

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I'm reading a book on bank M&A and JPM is used as an example repeatedly of what a bank with bad internal controls looks like and the consequences therein.

 

I would say yours is the interesting perspective. What's the book and can you elaborate.

 

The Art of Bank M&A by Alexandra Reed Lajoux and Dennis Roberts. 

 

They discuss how JPM passed their stress test through portfolio positioning yet had the failed trade in London plus had to pay $400m for rigging electric rates.  That those situations should have been caught with better internal controls but weren't. 

 

His conclusion was that it remains to be seen whether JPM has changed internally, but he says the market doesn't seem to care as the stock has risen.

 

The book is excellent for anyone interested in bank M&A.  It's written from the perspective of an investment banker.  It goes deeply into regulatory issues, how to conduct due diligence etc. 

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I'd be surprised JPM can earn an ROE as high as BAC once the damn Justice Department will stop coming after them.

The extra capital requirements alone will make it quite difficult for JPM. I know JPM has smoked BAC the last 5 years but the next 5 years is not so clear, in my judgement.

I would bet on BAC for a higher ROE from 2016-2020.

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I will also toss my hat in the ring of JPM being quite overrated by most investors I talk to.  JPM has been at the absolute center of many really shady things (from Madoff to Munis, to Mortgages).  Somehow Jamie (who is really talented I think) has overcome this with great PR to white wash the company and make them seem clean.  But I think JPM has internal issues from many folks I've talked to, and I do prefer BAC in general.  Although I would guess both will be good investments from here. 

 

People always point to JPM's ROE as some badge of honor, but C had great ROE prior to the crisis, and I think C was a poster for a lot of things JPM is as well... it works well until your business processes (or lack) catch up.

 

Just my 2 cents... this is more qualitative than quantitative, but I think qualitative is quite important when dealing with leveraged companies.

 

Ben

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People always point to JPM's ROE as some badge of honor, but C had great ROE prior to the crisis, and I think C was a poster for a lot of things JPM is as well... it works well until your business processes (or lack) catch up.

 

 

I know a bank investor who said to me "There were a number of banks with 15% ROE's up until the day they failed in 2008 and 2009."  Yes, ROE isn't everything.  A bank can have a high ROE and then fail, a number did.  Not saying this is true for JPM, but the rest of your comment fleshed this out, there are more factors beyond just a single stat or two.

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I know a bank investor who said to me "There were a number of banks with 15% ROE's up until the day they failed in 2008 and 2009."  Yes, ROE isn't everything.  A bank can have a high ROE and then fail, a number did.  Not saying this is true for JPM, but the rest of your comment fleshed this out, there are more factors beyond just a single stat or two.

 

One of my filters as an investor (caused me to miss huge blow ups and miss big winners) is to look skeptically at companies with great ROIC / ROE that I can't explain.  In JPM's case, I think you can explain a good chunk of it, but a chunk is also due I think to improper business practices.  May or may not ever come to matter, but as an investor, I think you have to at least be able to explain superior financial performance.  If you get, some macro factor you don't see may be lurking and waiting to bite you.

 

But again, it's really just back to a single metric being insufficient, like you say.

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I think WFC is much better than JPM and certainly BAC.

JPM and BAC has much higher personnel cost due to their investment banking business. On the traditional lending side, WFC has more foot soldiers and do give more attentions to customers. When I applied for mortgage for my house, I had better experience with WFC compared to BAC.  I think BAC's checking and online investments are better deal than WFC for retail customers, but WFC is definitely more aggressive in trying to lead me money.

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I will also toss my hat in the ring of JPM being quite overrated by most investors I talk to.  JPM has been at the absolute center of many really shady things (from Madoff to Munis, to Mortgages).  Somehow Jamie (who is really talented I think) has overcome this with great PR to white wash the company and make them seem clean.  But I think JPM has internal issues from many folks I've talked to, and I do prefer BAC in general.  Although I would guess both will be good investments from here. 

 

People always point to JPM's ROE as some badge of honor, but C had great ROE prior to the crisis, and I think C was a poster for a lot of things JPM is as well... it works well until your business processes (or lack) catch up.

 

Just my 2 cents... this is more qualitative than quantitative, but I think qualitative is quite important when dealing with leveraged companies.

 

Ben

 

Very well said.  I have some JPM shares, but much more exposure to BAC.  JPM strikes me as an organization that is always going to have special "events".  There is alot of hubris at JPM.

 

BAC and Moynihan seem less likely, now, to get into the doo doo.  WFC is the standard bearer and I have a significant investment in it as well.  I like that BAC is tending toward WFC's type of business.  BAc is slowly getting Buffetted.

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I'm kind of shocked by the general sentiment. JPM's grown tangible book value per share from $23 to $45 from 07-14 while paying fairly sizable dividends over that period.  I can't see how you would say Jamie hasn't navigated the company through the storm beautifully. And when you judge each of the company's two main segments (it is a retail and investment bank) independently relative to its peers, its performance has been best in class.

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I'm kind of shocked by the general sentiment. JPM's grown tangible book value per share from $23 to $45 from 07-14 while paying fairly sizable dividends over that period.  I can't see how you would say Jamie hasn't navigated the company through the storm beautifully. And when you judge each of the company's two main segments (it is a retail and investment bank) independently relative to its peers, its performance has been best in class.

 

You do have a point Nick.  I (we) may be getting jaded by recent events that make bad press. 

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JPM was a big beneficiary in the TARP process - they got WaMu for negative good will by the govt. This was a matter of controversy and was in the courts. If one looked at the court filings, JPM didn't come across as ethical. This again is going at the qualitative, not the quantitative aspect.

 

I'm kind of shocked by the general sentiment. JPM's grown tangible book value per share from $23 to $45 from 07-14 while paying fairly sizable dividends over that period.  I can't see how you would say Jamie hasn't navigated the company through the storm beautifully. And when you judge each of the company's two main segments (it is a retail and investment bank) independently relative to its peers, its performance has been best in class.

 

You do have a point Nick.  I (we) may be getting jaded by recent events that make bad press.

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I'm kind of shocked by the general sentiment. JPM's grown tangible book value per share from $23 to $45 from 07-14 while paying fairly sizable dividends over that period.  I can't see how you would say Jamie hasn't navigated the company through the storm beautifully. And when you judge each of the company's two main segments (it is a retail and investment bank) independently relative to its peers, its performance has been best in class.

 

You do have a point Nick.  I (we) may be getting jaded by recent events that make bad press.

 

As if on cue, the front page of the WSJ reads:

 

"Emails Track J.P. Morgan Hire in China

 

Gao Jue did poorly on his job interview at JP Morgan & Chase & Co., he messed up his work visa, accidentally sent a sexually explicit email to a HR employee and was described by a senior bank as 'immature, irresponsible and unreliable,' according to internal bank emails and people familiar with the matter. Yet the bank hired him, saved him during major job cuts and later was prepared to offer him another position..."

 

Regarding Shalab, court filings can be a tricky source. Look at how the US Government is depicted in Starr International Co vs the US.

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Nick, I don't mean to be a total hater on JPM, but looking at historicals, you are right, JPM has been quite good.

 

I wonder though, if JPM would have been more roughly treated for facilitating the Madoff fraud (not an impossible chance I don't think just based on what I read, but I'm not an expert), I wonder if their numbers would have been as good?

 

To some extent, much of the US financial landscape (I own both WFC and BAC and was a big buyer of WFC in early '09... just to frame that I'm not some outsider hater) and global banking generally looks quite a bit like organized crime in some ways.  I think looking at at numbers without contextualizing them can be problematic.  People still get all riled up about the fines big banks are paying, but I think dispassionate observers have to say that this industry has (and often times still is) behaving as if the rules don't apply to them.  The behavior seems to be that if an expensive enough lawyer signs off on it, then you can basically do anything you want, pay a fine if you get caught, and there is no real penalty.  It may be that someday with a prosecution system more prone to fight for big trials vs. settlements, this kind of arrangement (for many corporations, not just banks) may be altered.  I don't think the possibility is out of the realm of reality.

 

However, I think the core businesses of JPM are quite good, which is why I say that it should be a good business / investment going forward... so I'm only arguing the point tangentially.

 

Hope that helps... I think your view is by far the majority view (that doesn't mean it's right or wrong)... JPM is widely viewed as a great bank with a great leader.  You are in good company, including Buffett!

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  • 3 weeks later...

JPM held their investor day two days ago and exceeded expectations. They basically said they can continue to grow earnings despite the regulatory overhang. They communicated $30 billion in 'normalized' earnings by 2017 which = about $8.00 per share. Add a 12 PE and you get a share price of $96; with the stock trading just over $61 this would result in more than 50% gain in under 3 years... Not too shabby for what is now essentially a regulated/utility type business. Dimon also stated we could see a dividend payout ratio = 50% of earnings; this would provide a yields greater than 4% ($8 in earnings and the stock trading at $96).

 

The regulations are resulting in the big banks significantly de risking their balance sheet. And every year that passes allows the banks to clean up their legacy real estate issues. With house prices in the US rising nicely the past few years this also must be helping to clean up legacy issues.

 

I am hopeful that BAC is able to articulate their 'plan' as well as JPM has just done. BAC trades today at $16.00.  TBV (Dec 31) = $14.40. Let's assume BAC pays $0.30/share in dividends and earns $1.30/share in 2015. In early 2016 a buyer today would see their cost base fall to $15.70. At the end of 2015 TBV will likely be about $15.70. If you buy the stock today there is a good chance your cost base will be = TBV in 10 months time.

 

The key for BAC moving forward will be if they can have a (relatively) clean year of earnings so investors can get comfortable with what it can actually earn moving forward. Time should reward the patient investor quite well when it comes to BAC.

 

JPM earnings are more predictable right now and they have articulated their near term plan very well. The shares are increasing nicely as a result. bottom line is the large US banks are crazy cheap; perhaps the JPM presentation will be viewed as an inflection point (in hindsight) in investor sentiment.

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I'm kind of shocked by the general sentiment. JPM's grown tangible book value per share from $23 to $45 from 07-14 while paying fairly sizable dividends over that period.  I can't see how you would say Jamie hasn't navigated the company through the storm beautifully. And when you judge each of the company's two main segments (it is a retail and investment bank) independently relative to its peers, its performance has been best in class.

 

+1

 

I own both JPM and BAC.  Those JPM warrants were damn cheap too.

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