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JP Morgan Chase stock: research background, ROE, future, ROR with CAPM, value

Provide a buy or sell recommendation and an estimated price target. Should include the following 5 sections:

1) Background of the company with a life cycle analysis
2) Analysis of Return on Equity
3) The company's future growth rate of earnings
4) Analysis of its required rate of return using the CAPM
5) Intrinsic value calculation using discount valuation techniques

Decide if the current price is overvalued or undervalued with respect to your calculated intrinsic stock price. State why the stock price is over-or undervalued, show your calculations, and state the assumptions (why are you using a certain growth rate or capitalization rate, for example) that you based your decision on.

Describe the competitive forces in the industry including the company's relative advantages and disadvantages to its competitors and include a discussion on ROE as the basis for growth.

This analysis should include demographic trends. Include references

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Background
JPMorgan Chase 7 Co. (NYSE: JPM) is one of the largest financial institutions in the United States. It is a financial holding company with services ranging from investment banking, commercial banking, treasury and securities services, asset management, retail financial services and card services (Yahoo! Finance, 2009).

Analysis on Return on Equity and Company's Future Growth Rate

2008 2007 2006 2005 2004
Net income 5605 15365 14444 8483 4466
Equity 166884 123221 115790 107211 105653
Return on equity 3.36% 12.47% 12.47% 7.91% 4.23%

From the above graph, JPMorgan & Chase Company's return on equity was significantly affected by the financial crisis and the losses it absorbed on its purchase of Bear Stearns. However, if the results of operations for 2008 are isolated, then from 2004 to 2007, the company's ROE has a compounded annual growth rate of 43.39% - an impressive growth.

Given that 2008 is an uncommon year, the researcher, based on analysis of macroeconomic indicators, believes that the future growth rate of JPMorgan & Chase will revert to its trend before 2008.

Analysis of Required Rate of Return Using CAPM

Source: Google Finance, 2009.

According to the capital asset pricing model, the required rate of return of equity such as that of JPMorgan Chase & Company can be computed by the following formula:

r = Rf + Beta x (RM - Rf)
Source: Chartered Financial Analyst ®, 2009
Where
r = required rate of return
Rf = risk free rate
RM = market risk free premium

To calculate for JPMorgan & Chase Company's required rate of return, the following variables are needed:

Beta = 1.20 (Yahoo! Finance, 2009)
Risk free rate = 3.352% (Yahoo! Finance, 2009)
Market risk premium = -9.152%

Hence, the required rate of return for JPMorgan & Chase Company is
r = 3.352% + (1.20 x -9.152%)
r = -7.63%

The researcher used the 10-year Treasury note current ...

Solution Summary

JP Morgan Chase stock is examined. The research background, ROE, future, ROR with CAPM and value is given.

$2.19