JPMorgan Chase & Co.

Stock Analysis

Table of Contents
Table of Contents....................................................................................................... 2 Company Description:................................................................................................3 Company Analysis:.....................................................................................................4 Company Strategy:................................................................................................. 4 Company Management:..........................................................................................4 Porters Analysis .....................................................................................................6 Stock Price Performance:...........................................................................................7 Total Return Analysis:................................................................................................ 7 Dividend Policy:.......................................................................................................... 8 Financial Analysis:......................................................................................................8 Key Ratio Analysis .....................................................................................................9 Valuation Analysis.................................................................................................... 10 Analyst ratings......................................................................................................... 10 Portfolio analysis...................................................................................................... 10 Risk Factors.............................................................................................................. 11 Pros and Cons:......................................................................................................... 12 Conclusion................................................................................................................ 12 Bibliography............................................................................................................. 13 APPENDIX................................................................................................................. 14

Company Description:
JPMorgan Chase & Co., herein referred to as JFM, is one of the oldest financial institutions in the United States. It is a leading global financial services firm with assets of $2 trillion operating in more than 60 countries. It is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management and private equity. It is in the other diversified financial services industry and is listed within financial sector ((S&P 500). JPMorgan Chases principal bank subsidiaries are JPMorgan Chase Bank, National Association (JPMorgan Chase Bank, N.A.), a national bank with branches in 23 states in the U.S.; and Chase Bank USA, National Association (Chase Bank USA, N.A.), a national credit card issuing bank. JPMorgan Chases principal nonbank subsidiary is J.P. Morgan Securities Inc., an investment banking firm. . JPMs major competitors are Bank of America Corporation (BAC) and Citigroup Inc (C)

JPMs current price is $53.86 (Yahoo March 22, 2010) with the 52-week range of $17.25 $55.20. JPM paid dividends of $0.20 on June 1st 2010. The number of shares outstanding is 469,135,000 with 2.87% held by all insiders and 65.8% held by institutional and mutual fund owners (Yahoo Finance).

Company Analysis:
Company Strategy:
The company plans to continue to grow its sales force in the RFS (Retail Financial Services) segment through adding personal bankers and specialists that include loan officers, investment sales representatives and small business relationship managers. With rising expectations of continued weakness in its subprime mortgage business, JPM may use the downturn in the subprime market as an opportunity to purchase underpriced assets. A healthy pipeline of M&A activity will help boost growth in the investment banking business. These focused points along with the continued integration and rebranding of Bank One will help JPM maintain healthy banking fundamentals and good earnings growth.

Company Management:
JPM was founded in 1823 and incorporated at Delaware. The total number of employees and stock holders are 222,316 and 233,559 respectively. JPMorgan Chase & Co.s Governance Risk Indicator (GRI) as of Oct 1, 2010 is:

Board

low risk

Audit

low risk

Compensation Shareholder rights

low risk low risk

As of October 2009, JPMorgan Chase's Corporate Governance Quotient (CGQ) is better than 84.7% of S&P 500 companies and 97.6% of companies in diversified financials industry. The insider ownership of shares is 0.45% and the institutional ownership is 74.9%.

Business:
JPM has six business segments. Here is a snapshot of business segments and their functions: Investment Bank (IB): IB offers a full range of investment banking products and services in all major capital markets, including advising on corporate strategy and structure, capital-raising in equity and debt markets, sophisticated risk management, market-making in cash securities and derivative instruments, prime brokerage, and research. Retail Financial Services (RFS): RFS includes the Retail Banking and Consumer Lending businesses, serves consumers and businesses through personal service at the bank branches and through ATMs, online banking and telephone banking, as well as through auto dealerships and school financial-aid offices. Credit Card Services (CS): CS is one of the nations largest credit card issuers, with more than 145 million credit cards in circulation and over $163 billion in managed loans. Commercial Banking (CB): CB serves nearly 25,000 clients nationally, including corporations, municipalities, financial institutions and not-for-profit entities with annual revenue generally ranging from $10 million to $2 billion, and more than 30,000 real estate investors/owners. Treasury & Securities Services (TSS): TSS is a global leader in transaction, investment and information services. TSS is one of the worlds largest cash management providers and a leading global custodian. Treasury Services

(TS) provides cash management, trade, wholesale card and liquidity products and services to small and mid-sized companies, multinational corporations, financial institutions and government entities Asset Management (AM): AM offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity products, including money-market instruments and bank deposits.

Porters Analysis
Competitive Rivalry: JPM has been facing a high degree of competitive rivalry due to having operations in more than 60 countries globally and regionally. Threat of New Entrants: The industry in which JPM operates places much emphasis on service quality and also the information systems. Deploying reliable information systems and maintaining high levels of service quality can cost a hefty price which deters the entry of new competitors. Threat of Substitute Products: Customers may find using traditional face-to-face banking with the banking personnel less expensive rather than employing the new services offered by JPM. Bargaining Power of Suppliers and Customers: The bargaining power of customers is high as there are a large number of competitors in the industry. The customers have wide variety of choices in financial services. The bargaining power of suppliers is low as the company focuses on maintaining good supplier relations through Supply Diversity Networks (SDN).

Stock Price Performance:

The current stock price is $39.65 (Yahoo! Finance). In the five-year period, the stock has been outperforming S&P 500 from 2006, as can be seen in Chart 1 (TAB C). As shown in Chart 2, in the last one year, JPM has underperformed S&P 500. As shown in Chart 3, the current price of stock is greater than 50-day moving average. This suggests that an uptrend in the stock price can be expected. JPMs price change in the past 3 months is 9.1%, which is less than that of industry group (33.5%). According to Value Line, JPMs Beta of 1.13 is lower than its industry Beta of 1.8. JPMs risk of 154 is less than 169 of Citigroup and 166 of Bank of American Corp. As shown in Chart 4 (TAB C), 70% of the tickers in US Markets are riskier than JPM (Risk Grade). It means that JPM is less risky than the majority of companies in its industry. JPMs estimated price for one year is $53.14 (Yahoo! Finance) and the estimated price for five years is $75 (Value Line). According to valuation using current multiple (P/E) shown in Table 3 (TAB B), the price is expected to increase by 7.73% in 2010 and 37% in 2011. As shown in Table 4 (TAB B), the industry's current multiple (P/E) valuation shows that the growth is 60.92% in 2010 and 76.26% in 2011.

Total Return Analysis:

Chart 5 (TAB C) and Table 6 (TAB B) compare the five-year cumulative total return for JPM with the cumulative returns of the S&P 500 Stock Index and the S&P Financial Index. Chart 5 (TAB C) and Table 6 (TAB B)assume simultaneous investments of $100 on December 31, 2004, in JPMorgan Chase common stock and in each of the above S&P indices.

The comparison assumes that all dividends are reinvested. As shown in Chart 5 (TAB C)., the returns of JPM has outperformed S&P 500 and S&P 500 Financial index in 2008 and 2009. As shown in Table 8 (TAB B), the total returns of JPM are more than that of S&P 500 for the period of three, five, 10 and 15 years.

Dividend Policy:
JPM paid $0.05 dividends on July 31st 2010. Early in 2009, JPM cut the annual dividends from $1.52 to $0.20 per share. This drastic move is premised on the need to be prepared for a prolonged and potentially terrible economy. As shown in Table 9 (TAB B), the dividend yield is 4.8% in 2008 and 1.27% in 2009. The dividend payout ratio is 186.215 in 2008 and 9.427 in 2009. According to Value Line, dividend will increase up to $1.20 and dividend yield will increase to 2.2 % during 2012-2014.

Financial Analysis:
As per Standard & Poors, the long term issuer credit rating for JPM is A+ and short term issuer credit rating is A1 (Extremely Strong). The financial statements are located in TAB A in the appendix. From the statement of cash flows, it can be observed that total cash flows from operations remain positive and increased from 2008 to 2009. JPM has reported net income of $11.7 billion, or $2.26 per share, in 2009, compared with net income of $5.6 billion, or $1.35 per share, in 2008. Total net revenue in 2009 is $100.4 billion, compared with $67.3 billion in 2008. Return on common equity is 6% in 2009 and 4% in 2008.

The increase in net income for the year was driven by record net revenue, including record revenue in the investment banking segment which reflects modest net gains on legacy leveraged-lending and mortgage-related positions compared with net markdowns in the prior year. Table 5 (TAB B) shows that the net income, operating margin and quarterly revenue growth of JPM are greater than those of its competitors and its industry. As per the Value Line, the net income is expected to increase to $59 billion by 2015. As per Value Line, companys financial strength is rated as A.

Key Ratio Analysis

As shown in Table 10 (TAB B), the ROA, ROI, ROE and five year sales growth and five year earnings per share growth rate are decreased in 2008 due to economic downturn and witnessed an increase in 2009. As per Value Line, these ratios are expected to grow indicating a good performance during 2011 to 2015. As shown in Table 11 (TAB B), the P/E ratio of JPM is less than that of its industry. The return on equity of JPM is 6.307% which is higher than 2.321% of its industry. This indicates that JPM is better off in generating profit with the money shareholders have invested. JPM reported earnings per share of $ 3.39 are higher than $ 0.74 of its industry indicating that JPM has better profitability.

Valuation Analysis
To evaluate the JPM price, there are four valuation models inclusive of free cash flow to the firm, free cash flow to equity, dividend target discount model, and residual income model. Based on the data from Value Line and Eval including Beta, long term debt, long term interest, number of shares, magic number, etc, WACC (cost of capital) is 8.7% and the required return was found to be 13.07% (Table 7 in TAB B). The stock price in FCFF model was $183.89 per share, the FCFE model valuation was $49.82 per share, and the DDM model valuation was $8.33 per share (table 7). The average price over 5 years target is $80.51 per share while the current price of $38.06. According to Value Line, the price is expected to reach $75 per share in five years.

Analyst ratings
Analyst S&P 500 Money central Yahoo! Finance Reuters Rating Strong Buy Strong Buy Moderate Buy Strong Buy Moderate Buy Buy

Portfolio analysis
The portfolio of Student Managed Investment Fund (SMIF) currently contains stocks from insurance industry and other financial services industry. The fund recommended allocation for the financial sector is 11.3% in 2010. S&P 500 index reveals 13.2% of the total portfolio should be allocated to the financial sector. Investing in JPM will help to diversify the portfolio

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and decrease the risk for SMIF. Moreover, this is the potential company and will benefit the fund.

Risk Factors
Here are the risk factors that could materially affect the financial condition and operations of JPM.
1. International financial market and economic conditions: JPMs businesses have

been, and in the future will continue to be, materially affected by economic and market conditions, including factors such as the liquidity of the global financial markets, the level and volatility of debt and equity prices, interest rates and currency , investor sentiment, inflation acts of war or terrorism and recessionary pressures.
2. Financial condition of clients and customers: JPM routinely executes transactions

with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose it to credit risk in the event of default by the counterparty or client.
3. Regulations and environmental risks: JPM has also invested in companies engaged

in wind energy and in sourcing, developing and trading emission reduction credits. As a result of these activities, it is subject to extensive and evolving energy, commodities, environmental, and other governmental laws and regulations. It may incur substantial costs in complying with current or future laws and regulations. The failure to comply with these laws and regulations may result in substantial civil and criminal fines and penalties.

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Pros and Cons:

Pros: 1. Less risky than its industry and competitors 2. Strong financials 3. High recovery potential
4. Good projections of rise in earnings by Yahoo! Finance, Value Line.

5. Excellent analyst ratings ( Strong buy )

Cons: 1. Largely dependent on the international financial markets and economic conditions 2. Risk of regulations and environmental conditions 3. Higher debt ratio compared to that its industry

Conclusion
The analysis of JPM showed it to have a low Beta value indicating that it is less risky than its industry. The recommendations from ValueLine.com, Yahoo! Finance and different analysts suggest that the stock has good prospects for the rest of 2010 and 2011. The stock price and earnings are estimated to increase in next four years. Based on the above analysis, it is recommended to invest 3% of the Student Managed Investment Fund in JPM.

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Bibliography

1. Investopedia. http://www.investopedia.com/terms/ 2. Yahoo Finance. http://www.finance.yahoo.com 3. Google Finance. http://www.finance.google.com 4. Wikipedia. http://www.wikipedia.org/wiki/AmericanExpress 5. Nasdaq. http://www.nasdaq.com 6. ValueLine. http://valueline.com/ 7. Sector Spdr http://www.sectorspdr.com/shared/pdf/sectorResearch/XLFaltavista.pdf 8. Industry survey http://emi.compustat.com/cgi-irwinus-doc/docserver.cgi?

keytype=INDSUR&keyval=ILH&doctype=IS&docformat=pdf&date=200910&ie=.pdf 9. Company 10-K reports

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APPENDIX

14

TAB A

15

TAB B

16

TAB C

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TAB D

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TAB E

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Table 1: Key ratio comparison Div. ROE Yield P/E % % EPS 11.73 6.307 1.272 (51.9)(N/A) (1.321) 0.266 N/A (7.89) 0.302

Stock JPM BAC C

3.39 -0.3 -0.3

Table 3: Valuation using current multiple (P/E):

Fiscal Year

Est Low/High Price Range

Avg. Est. Price

42.71 54.29

% Change for Average

7.73% 36.95%

Dec-10 33.93-47.62 Dec-11 46.80-61.78

Table 4: Valuation using the industry's current multiple (P/E)

Fiscal Year Est. Price % Change Dec-10 36.14 -8.84% Dec-11 45.94 15.88%

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Table 5: Direct competitor comparison

Direct Competitor Comparison Indus try 13.06 B 30.71 K 17.00 % 4.42B 0.00% N/A 33.75 % N/A 0.74 15.07 1.24 2.41

Market Cap: Employees: Qtrly Rev Growth (yoy): Revenue (ttm): Gross Margin (ttm): EBITDA (ttm): Operating Margin (ttm): Net Income (ttm): EPS (ttm): P/E (ttm): PEG (5 yr expected): P/S (ttm):

JPM 157.6 0B 232,9 39 23.60 % 88.00 B N/A N/A 42.66 % 13.44 B 3.39 11.71 1.34 1.79

BAC 136.8 6B 283,0 00 8.50% 72.51 B N/A N/A 12.10 % -2.00B -0.2 N/A 1.4 1.88

C 120.2 4B 259,0 00 10.90 % 48.53 B N/A N/A 1.17% -3.90B -0.17 N/A 0.41 2.47

Table 6: Returns analysis

JPMorgan S&P Financial S&P 500 Chase Index Index 100 100 100 105.68 106.48 104.91 132.54 126.91 121.48 123.12 103.27 128.16 91.84 46.14 80.74 123.15 54.09 102.11

2004 2005 2006 2007 2008 2009

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Table 7: JPM valuation analysis WACC CAPM Calculation Value/share based on FCFF Model Value/share based on FCFE Model Value/share based on DDM Model CFROI Analysis (Refer Appendix TAB E) Residual Income Model (Refer Appendix TAB D) Recommended 5-Year Target Price Table 8: Total returns analysis
Total Return % JPM S&P 500 1351015YTD Year Year Year Year Year -4.39 -9.04 -4.16 5.97 1.48 6.84 5.68 13.84 -7.27 1.51 -0.26 6.59

0.087302 0.13075 $183.39 $49.82 $8.33 -0.38% $40.65 $80.51

Table 9 : Dividends Analysis

JPMORGAN CHASE & CO Dec09 Dec08 Dec07 5.609 2.570 10.453 1.272 4.821 3.299 63.304 152.166 161.375 9.427 186.215 33.615

Earnings Yield Dividend Yield Relative Dividend Yield Dividend Payout Ratio

Dec06 8.161 2.816 146.265 35.617

Dec05 6.121 3.427 177.298 57.037

Table 10: Key ratio analysis 2005-2009 .

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2009
P/E Ratio Price/Sales ROA ROI ROE 5-yr Sales Growth 5-yr EPS Growth 18.520 1.421 0.438 2.314 6.307 18.440 7.830

2008
36.663 1.160 0.162 0.872 2.343 15.120 (15.810)

2007
9.678 1.263 1.055 5.847 12.857 19.240 40.500

2006
12.290 1.684 1.070 6.147 12.245 16.160 38.250

2005
16.333 1.732 0.719 4.169 7.976 10.610 (3.610)

Table 11: Key ratio analysis of industry and competitors Div. Yield % EPS 1.272 3.39 0.266 -0.3 0.302 -0.3 1.122 0.74

Stock JPM BAC C Industry

P/E 11.73 (51.9)(N/A) N/A 15.07

ROE % 6.307 -1.321 -7.89 2.321

Chart 1: Stock price analysis of JPM for five years

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Chart 2: Stock price analysis of JPM for one year

Chart 3: Moving average

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Chart 4: Risk Ranking

Chart 5:

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