Key Points
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JPMorgan Chase’s latest financial results came in well ahead of Wall Street estimates.
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The massive bank is certainly exposed to changing macro forces, and CEO Jamie Dimon is fully aware of near-term risks.
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Based on two popular valuation metrics, the stock looks expensive today.
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10 stocks we like better than JPMorgan Chase ›
Investors probably don’t expect huge gains from businesses that operate in a very mature industry like financial services. But JPMorgan Chase (NYSE: JPM) has shown that it can be a big winner. The massive bank has generated a total return of 252% in the past five years (as of July 28).
The company continues to report strong financial results that keep supporting the bullish fever among the investment community. This financial stock trades in record territory. So, is JPMorgan Chase a buy right now?
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Image source: JPMorgan Chase.
Beating estimates
It seems that every single quarter, JPMorgan Chase’s latest numbers come in well ahead of Wall Street analyst estimates. This is exactly what happened in Q2, which ended on June 30, with both revenue and diluted earnings per share (EPS) beating expectations handily.
During the three-month period, the company reported net revenue of $44.9 billion. The commercial and investment banking segment was the standout performer, with net revenue up 9% year over year. Trading activity and deal-making were both robust.
JPMorgan Chase raked in net income of $15 million in Q2. This points to just how profitable the business is, with its superb net profit margin of 33.4% in the latest quarter. This supports management’s capital allocation policy, with $3.9 billion paid in dividends and $7.1 billion going to share buybacks in the past three months.
Jamie Dimon’s cautious outlook
The economy appears to be on better footing than it was earlier in the year, when the trade situation looked more dire and consumer sentiment was declining. But JPMorgan Chase CEO Jamie Dimon remains cautious, adopting a view that goes against that of other bank executives, who are more optimistic.
“Significant risks persist — including from tariffs and trade uncertainty, worsening geopolitical conditions, high fiscal deficits and elevated asset prices,” Dimon said in a press release.
His commentary points to an issue that investors might have, which is that banks generally are cyclical companies. Their performance is tied to macro forces, particularly the trajectory of interest rates. The challenge is that it’s impossible to predict what direction interest rates are going in, although many believe the Federal Reserve will cut them later this year, a move that could spur lending activity and boost confidence among consumers and corporate executives.
At this point, JPMorgan Chase deserves the benefit of the doubt in that it should be able to navigate any economic turmoil that comes its way. It has a robust capital position, for instance.
JPMorgan Chase is considered a global systemically important bank by the Financial Stability Board. Its size and scope make it critical to the functioning of our economy, so the government likely won’t let it fail in an adverse situation because of the bigger problems that could cause. From an investment perspective, this can help give shareholders peace of mind knowing that the bank’s downside is supported.
High quality, high expectations
Most investors would consider JPMorgan Chase the top banking entity in the industry, thanks to its impressive financial performance and the capability of its CEO. The stock’s 252% five-year total return reflects just how much the market appreciates this company.
However, it’s time to take a closer look at the valuation. To be clear, shares do not look cheap by any measure. The current price-to-earnings ratio is 15.3, the highest it’s been in three years. The price-to-book ratio, which is a valuation tool that’s more pertinent in the banking industry, is above 2.4. This is the most expensive reading of this metric in 20 years.
It’s safe to say that JPMorgan Chase stock is trading far from bargain territory. While I believe that this is a high-quality company, the best thing investors can do is to wait for a more attractive valuation before buying shares.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
