J.P. Morgan: Bulls vs. bears

mcdonald_whalen.top.jpgAnalysts John McDonald (left) and Christopher Whalen face off on whether or not J.P. Morgan's stock has higher to climb.Interviews by Scott Cendrowski, reporter


(Fortune) -- If there was one bank that managed to emerge from the financial crisis unscathed, it was J.P. Morgan Chase. Led by CEO Jamie Dimon, the massive financial services company never posted a quarterly loss during the downturn.

J.P. Morgan (JPM, Fortune 500) shares have returned 82% in the past year, beating the S&P 500 (SPX) by 29 points, as its own trading floor boosts profits and investors anticipate consumer credit losses declining. In its most recent quarter, J.P. Morgan's profit more than quadrupled to $3.3 billion.

Now the big question is whether its stock can continue its run. We asked two analysts for their take.

Bull: John McDonald, Sanford C. Bernstein

"J.P. Morgan played its cards right through the crisis. We estimate it added $1 of earnings per share with the acquisitions of Bear Stearns and Washington Mutual. And while other banks were in cost-cutting mode, J.P. Morgan actually added bankers and salespeople across its retail, commercial, and asset-management platforms.

"JPM is a well-know company run by a respected management team. But those positive perceptions don't seem to be reflected in the stock. It trades at one times book value and at a price/earnings ratio of 7 if you consider that earnings in 1½ to two years should be at least $6 per share.

"We expect the bank to release reserves over the next year as its balance sheet shrinks and credit losses peak. That will add to capital. And I think the stock will be dragged up by more visible earning power, growth in book value, and a likely dividend increase. We think shares, now $43, can reach $56 in a year.

"And if there is some head-fake in the economy, or mid-cycle slowdown, it's better to be positioned in a company like JPM that not only has industry-leading capital reserve levels, but a management team that has been focused on their balance sheet and focused on scrutinizing every aspect on it."

Bear: Christopher Whalen, Institutional Risk Analytics

"J.P. Morgan got a great deal on WaMu, which it bought out of receivership for 3 cents on the dollar. Every time WaMu does a foreclosure, J.P. Morgan makes money. WaMu's a beautiful thing.

"The problem is Bear Stearns. Everybody thinks Jamie Dimon got rid of all of the bad from Bear. But he didn't deal with the legacy liabilities from its securitizations -- all the claims by investors who say, "Hey, this loan defaulted. Buy it back." They're dealing with that now.

"J.P. Morgan also has a lot of second-lien exposure, which it hasn't been talking about much. When the primary mortgage defaults, the loss on the second lien is 100%. And prime mortgage loss rates are still going up. There are a lot of people out there still paying their second liens. But it doesn't mean they're going to keep doing it.

"They haven't done anything with their Bear Stearns off-balance-sheet disclosure either.

"Jamie's got some legacy issues in his retail business that investors don't think about. We think those losses could be more than $50 billion over the next three years. That's why my negative outlook." To top of page

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