Question

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:

1. Visit this Web site.
2. Type in your selected company’s name in the Quote Search box, and select your company's stock symbol. Jot down the current stock price.
3. Select the Analysis tab, and find the Analyst Recommendation box. Jot down the stock’s Earnings Per Share (EPS) Estimate.
4. Select the Price Ratios tab, and jot down the current Price to Earnings Ratio (P/E) for the industry (not the company).
5. Using the PE valuation model to determine the right price for this stock, multiply the industry average P/E ratio by the stock’s EPS to estimate the intrinsic price of the stock.

Answer the following questions:

• Is this stock overvalued or undervalued when compared to the current stock price?
• What are the analysts’ recommendations for this stock (buy, sell, or hold)?
  • Do you agree with them? Would you consider purchasing this stock? Why?

Answer 1

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.