Serious Valuation Concerns Arise in JPMorgan

On a fundamental basis, the brokerage firm expects few surprises in the second quarter. Net interest, fee and trading revenues are estimated to all be relatively flat year over year. Based on the Federal Reserve’s recent commentary, Oppenheimer did push the “bottom” in the net interest margin out from the second quarter to the third quarter, and this leads to modest trims in estimates, but overall Oppenheimer doesn’t think it really matters.

Within the financial group, Oppenheimer’s favorites remain the “much hated” mega banks (Bank of America and Citigroup) and the card companies (Capital One and Discover). There is still modest upside potential relative to the market in JPMorgan, but not enough to warrant an Outperform rating at this time, in our view.

The move has left the group’s valuation at a relative multiple to the S&P of about 72%, very close to its historical (1995 to 2005) average of 73%. The group is not expensive, and one should still be relatively fully weighted, but its valuation is largely baking in the benefit of rising rates in 2016.

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According to Oppenheimer:

Net interest and fee revenues have essentially been flat since mid-2011, and the only core earnings growth has come from a steady decline in credit losses and core operating expenses. We expect 2Q15 to be more of the same. That said, despite the boredom in the fundamentals, the stocks do zig and zag a bit. They have zigged a lot recently, and we’d advise investors to zag toward a bit more caution.

Shares of JPMorgan were down 2% at $67.57 on Monday morning. The stock has a consensus analyst price target of $71.50 and a 52-week trading range of $54.26 to $69.82.