High-yield/macroeconomics (fka YIELD)

[DewDiligence]

Why JPMorgan Could Jump 50%

http://online.barrons.com/article/SB122549308113489425.html#SECOND

›3-Nov-2008

After helping clean up america's banking mess, JPMorgan Chase is getting ready to deliver tidy returns to investors. The financial giant, which has scooped up both Bear Stearns and Washington Mutual, could see its stock climb by 50% once the economy improves.

"When you look at who's got the best earnings power in 2010 or 2011, relative to the share price, JPMorgan stacks up very well," says Jason Polun, an equity analyst at asset manager T. Rowe Price.

Recently about 42, the shares (ticker: JPM) have lost 10% since our upbeat profile last year. But that's far better than the 40% loss notched by the KBW Bank Index.

Yes, JPMorgan has taken some lumps as the credit environment has deteriorated, especially in consumer businesses like credit cards. The bank earned 11 cents a share in the third quarter, down sharply from 97 cents a year earlier, on revenues of $14.7 billion. Credit costs, which include charge-offs and additions to loan-loss reserves, totaled nearly $4.7 billion, versus $2.3 billion 12 months earlier.

"If the economic environment worsens, we'll add further to reserves but we are well reserved for" the current conditions, the bank's chief financial officer, Michael Cavanagh, tells Barron's.

Indeed, JPMorgan could well emerge as a more formidable competitor than ever.

Helped by a strong balance sheet, CEO Jamie Dimon acquired Bear Stearns in March for a cheap $10 a share. Though not considered a home run, the deal did give the bank an instant presence in equity prime-brokerage, serving hedge funds.

Dimon then earned plaudits for acquiring WaMu, which regulators seized after it failed under the weight of bad mortgages. The deal, in which JPMorgan paid the FDIC $1.9 billion, gets the bank into California and Florida, big markets it long coveted.

"They are busy capturing market share," says Anton Schutz, portfolio manager of the Burnham Financial Services Fund (BURKX), a stockholder. "People view them as the safest of the safe."

That perception also has helped the bank grow its deposits, which are crucial because they provide more stable funding costs than other sources. In fact, the WaMu deal made JPMorgan the No. 1 bank in deposits, with accounts totaling $969.8 billion as of Sept. 30. That was up from $678 billion a year earlier.

Earnings per share, expected at $3 next year, could climb to $5 when the economy firms up -- perhaps within two years, Schutz says. The shares now fetch less than eight times that estimate. If the multiple can rise to its historic norm of 12, the price would go $60. Meantime, the stock has a nice dividend yield of 3.68%.

JPMorgan, which already holds more capital than most peers, will soon get even stronger. The Troubled Asset Relief Program approved by Congress is pumping liquidity into nine large financial firms, including $25 billion of preferred shares into JPMorgan. The bank can use that to boost lending or make another acquisition.

"The WaMu deal gave them a tremendous footprint, particularly on the West Coast," says Schutz, "but if something came up in the Southeast, they'd be very happy to add that to their portfolio."‹