Meredith Whitney must be staggering her bank coverage news out to get more exposure, or at least that is a cynical take on the matter. Yesterday, she hit Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) on the earnings estimates for 2009 and 2010, with targets out to 2011 and 2012. Now she has hit JPMorgan Chase & Co. (NYSE: JPM) earnings estimates for this year and next. While this is under the consensus for this year and next, what we wanted to look at was beyond the call and see what would be fair forward valuations for the greatest money center bank in America based upon her estimates and Wall Street consensus estimates.
Whitney cut the current quarter for Q4-2009 earnings estimates to $0.45 EPS, down from $0.55 and down from a consensus reading of $0.64 from Thomson Reuters. That in turn has taken down the full year estimates by a similar amount to $1.95 EPS versus a Thomson Reuters consensus of $2.15 EPS.
The good news for JPMorgan is that the earnings estimates for all of fiscal 2010 are now $2.00 EPS rather than $2.05 EPS Whitney had before. But the consensus estimate from Thomson Reuters for Fiscal-2010 is actually up at $3.22 EPS. Whitney’s Fiscal-2011 earnings estimate is $2.50, with an estimate of $3.75 EPS in 2012.
Here is the issue at hand when you consider not just what Meredith Whitney is saying, but when you consider consensus estimates. When you are in late-Q4 2009 or even early Q1-2009, most investors are buying based upon what they expect for 2010 earnings. With a $40 handle today, this leaves JPMorgan shares trading at 20-times 2010 earnings. There is almost no doubt that JPMorgan is the safest or highest caliber of the money center or super-regional banks. But this leaves the stock trading at 20-times forward earnings, which is very high considering ‘the new normal.’
So here is the real question… Can investors in 2010 stomach a two-year outlook to get the earnings multiples back on track? Jamie Dimon has already hinted about the return to ‘the dividend’ in 2010, although at what rate that payout will be is up for debate. The dividend before the $0.05 per quarter of 2009 was $0.38 per quarter. That comes to $1.52 paid out per year, and Meredith Whitney’s $2.50 target for 2011 does not technically give enough of a dividend coverage to make up for the old dividend. It would effectively have a dividend coverage ratio of 1.5 out in 2012.
If you blended the 2011 to 2012 earnings estimates for a normalized outlook for a two-year time horizon for investors, then JPMorgan on a 2011-12 blended normalized earnings estimate would be $3.125 or thereabouts. Back in the days of old before valuations started getting sky-high, the banks used to trade at 10-times and 12-times normalized earnings. Then it was 15-times. The two answers to all these points boil down to 1) ultimately what earnings multiple YOU are willing to pay for forward earnings estimates, and 2) how far out on the horizon YOU are willing to pay for forward earnings.
It seems that a multiple of 20-times forward earnings is too high, even if this is over a transitional or turnaround period coming out of the abyss. If you use a 15-times earnings multiple starting early next year with a two-year average blended earnings, then 15-times a $3.125 blended earnings would come to a share value of $46.87. The issue here now is that many investors in early 2010 will still have a hard enough time just using a 2011 estimate. If they use the $2.50 estimate there, the a 15-times earnings multiple for the following year would generate a share price of $37.50.
So there is a disconnect in the stock today versus tomorrow. That is not at all unusual during transition and turnaround periods, and no one can just expect that stocks always adjust to a fair earnings multiple in times of change. Investors often do not use straight math like this, and admittedly this is the second most simple math test to use other than a trailing P/E ratio.
But there is also another disconnect here. Unless ‘the new normal’ is going to have investors all in agreement that the proper value for banks is at 20-times a blended forward earnings multiple for two-years out, then either the market is very wrong here with its higher earnings estimates or Meredith Whitney is very wrong here by having her earnings estimates far short of consensus. The market often gets its long-term bets wrong, and many pundits who make their reputation by being one of the first ultra-bearish pundits often stay bearish for far too long.
And then the flip-side to the argument. If you decide that 15-times earnings is a fair multiple to pay in early 2010 for all the way out to 2012 full earnings, effective a 3-year forward look, then Whitney’s $3.75 EPS target would generate a forward implied price target of $56.25 out into 2012. That would imply 40% upside total. And it needs to be considered again that Whitney is far under the consensus estimates in the near-term.
JPMorgan Chase shares are back in positive territory this morning at $40.040 after trading down close to $40.00 after the research note started circulating trading floors. Its 52-week trading range is $14.96 to $47.47. In early 2007 the stock was north of $50.00, and it brushed up right against the $50.00 handle twice in 2008 before the financial meltdown came to pass.
JON C. OGG
DECEMBER 18, 2009