Analysis: JPM C KEY

After you receive this Alert, we will be purchasing 200 shares of JP Morgan (JPM) at roughly $106.84 Following the trade, JPM will represent 0.74% of the portfolio.

We are calling up JP Morgan from the bullpen today. With our two other financial names, Citigroup (C) and KeyCorp (KEY) becoming recent sources of profits, we are adding JP Morgan, the largest U.S. bank by assets, to increase our financial sector exposure. From a macro view, we believe this sector will outperform in 2018 due to the higher interest rate environment and economic expansion from the tax cuts. In addition, we do not view the $2.8 million fine issued today by The Financial Industry Regularity Authority (FINRA) over supervisory failures as material to our long-term thesis.

To read our initial bullpen Alert, please see here . Our bullish thesis on JPM is mainly predicated on:

  • Due to the tax cut bill, we expect international industrials will borrow money overseas and deduct the interest against gains in those countries, rather than domestically.
    • Great for banks with worldwide presence who can act as an international bank for domestic borrowers who are looking to take advantage of a better tax regimen for interest rate deductions than they can now get here.
  • A rising interest rate environment increasing the spread between deposits and loans. Also, the business' core loans have been growing.
    • Both trends are positive to Net Interest Income, a key metric for financials.
  • Strong 2017 CCAR results (Fed stress tests), well above minimum thresholds.
  • Largest issuer of credit cards in the United States, and the Chase Sapphire Reserve has been a success.
  • Strong fee-based businesses with Investment Banking ranking #1 in Global Investment Banking Fees.
  • We expect trading revenue will improve in 2018 as current low-levels of volatility are unlikely to continue.
  • Potential deregulation in the future will lead to further upside.
  • Shares are yielding just over 2%, and the dividend has been steadily increasing.

Key metrics as of the third quarter of 2017:

  • 13% Return on Tangible Common Equity;
  • 12.5% Common Equity Tier 1;
  • 55.2% efficiency ratio;
  • $6.5 billion return to shareholders in the third quarter ($4.5 billion from net repurchase).

Source: JP Morgan Third Quarter 2017 Earnings Press Release

We are initiating the position with a $120 price target, which reflects roughly consensus 15.5x times 2018 EPS estimates. We recognize that shares are trading near an all-time high, which is why we are starting off relatively small today. Despite shares at this level, we are sanguine that the recently passed tax cut legislation, along with other positive industry factors mentioned above, will effectively lead to low-teen earnings per share growth.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long C and KEY.