In: Finance
The Price is Right!
Utilizing 1 of these public companies—Target, Coke, Pepsi,
Wal-Mart, or J. P. Morgan—determine the right price for that
company’s stock in the following 5 easy steps:
Answer the following questions:
The company we will consider is JP Morgan
Quote | JPM |
Current stock price (as of 5th April) | 105.34 |
EPS estimate for next year | 10.53 |
Banking Industry PE | 25.16 |
Company EPS* industry PE | 264.9348 |
big 4 PE | 8.8575 |
Company EPS* industry PE | 93.26948 |
Analyst recommendation | Hold/ overweight |
EPS estimates is the average of all analysts as per Yahoo
Finance
Big 4 PE is the average PE of the 4 biggest banks in the USA which
are- Bank of America, Citigroup, JP Morgan Chase, Wells Fargo
PE is a very preliminary measure of valuation for banks. As we can
see, if we consider the PE of banking industry, the bank is valued
at around $265 per share. By this measure, the company is very very
underpriced at this point. However, if we consider the PE of only
the comparable companies, the bank is valued at ~$93 which implies
that the bank is slightly overpriced at this time. The industry PE
is higher because it is simply the arithmetic average of all the
companies in the industry. There are few small banks which have a
very high PE which bring the average higher. However, for the
valuation to be accurate, we should compare the company with other
companies of the comparable aspects. Hence, the PE of big 4 is more
relevant. By this measure, the bank is slightly overvalued.
The analysts are recommending to buy this stock.
I agree with the analysts recommendation. The company appears
slightly overpriced when compared to other large banks. However, as
compared to the industry average, it is still underpriced.
Additionally, the larger banks have lower PE as the risk associated
with them is much lower than the larger industry. Hence, the hold
recommendation seems fair.