Stocks were down today, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (INDEXDJX:.DJI) declining 0.2% and 0.3%, respectively. The VIX Index, Wall Street’s fear gauge, climbed 0.7%, to close at 13.50. (The VIX is calculated from S&P 500 option prices, and reflects investor expectations for stock market volatility over the coming 30 days.)
The most valuable U.S. bank
Yesterday, Dow component JPMorgan Chase & Co. (NYSE:JPM) took Wells Fargo & Company (NYSE:WFC)‘s title as the most valuable U.S. bank. JPMorgan held that advantage today, even as emails surfaced showing that employees of JPMorgan, Washington Mutual, and Bear Stearns — the latter two firms were acquired in distress by JPMorgan during the financial crisis — cut corners in order to securitize poor quality loans. JPMorgan’s market capitalization is $183.3 billion against $182.5 billion for Wells Fargo.
| Price-to-Book Value | Price-to-Tangible Book Value | |
|---|---|---|
| Wells Fargo | 1.25 | 1.52 |
| JPMorgan Chase | 0.94 | 1.27 |
| Wells Fargo multiple premium | 33% | 20% |
Source: Author’s calculation, S&P Capital IQ
Does the gap in valuation imply JPMorgan’s are cheap? After all, the two banks are similar in one regard: They are arguably the best-managed banks in their peer group — Wells Fargo as a commercial bank, JPMorgan Chase as a universal bank that combines investment and commercial banking.
It would be premature to conclude the shares of JPMorgan are cheap, and here’s why. On the basis of the price-to-earnings multiple, Wells Fargo shares command a much smaller premium — just 5%:
| Price-to-Earnings* | |
|---|---|
| Wells Fargo | 9.51 |
| JPMorgan Chase | 9.04 |
| Wells Fargo multiple premium | 5% |
*Next twelve months’ earnings-per-share estimate. Source: Author’s calculation, S&P Capital IQ
As the banking environment and bank valuations normalize – JPMorgan shares now trade near their book value — it’s the opinion of this columnist that investors will pay more attention to the earnings multiple, which reflects earnings power, than to the book value multiple. Wells Fargo deserves a genuine premium in its price-to-earnings multiple. While the long-term earnings growth estimates for both are roughly identical (median estimates: 8%), the risk profile of Wells’ expected earnings stream is lower. JPMorgan may have taken Wells Fargo’s crown, but investors may be rewarded by swearing allegiance to a deposed king.
The article After Taking Wells Fargo’s Crown, Is JPMorgan a Steal? originally appeared on Fool.com and is written by Alex Dumortier, CFA.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow them @longrunreturns. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of JPMorgan Chase & Co (NYSE:JPM). and Wells Fargo.
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