Monday, December 15, 2008

JP Morgan (NYSE: JPM): Downgrade to Underperform at Merrill Lynch

Merrill Lynch downgrades JP Morgan (NYSE: JPM) to Undperform from Neutral while lowering tgt to $27 from $44.

Merrill expects 4Q loss of -$0.11 from +$0.25 on expectation of another significant round of credit reserve builds exacerbated by cap mkts activity, mark-to-mkt losses. Also rationalizing ‘09E to better reflect the deteriorating economic environment and better reflect the impact of WaMu loan portfolio. Key driver of new forecasts is expectation of loss rates moving up in-line with higher unemployment. Accordingly, they cut ‘09E to $1.98 (details within). They also stresstest forecasts for very real possibility of higher unemployment and find 09E could easily fall into the red.

Capital markets weak as marks continue
They are now forecasting another substantial ($2.8bn) mark-to-market loss in the Investment Bank as asset spreads have gapped meaningfully almost across the board. Investment banking activity has fallen dramatically and the firm expects the environment to remain weak in ‘09E as the economy remains in recession.

Underperform: Cutting PO to $27 from $44
Merrill does not believe the Street has rationalized the true impact of expected economic woes on Cons. Credit, and particularly what that means for JPM earnings. Their new ‘09E of $1.98 is 27% below consensus and represents a 5.3% ROE. Applying 0.7x expected BV of $39 to discount low ROE expectation offset by some valuation premium due to relative franchise strength, gives new PO of $27.

Notablecalls: How much is this downgrade worth? I think it's worth a lot. I see stock getting pounded towards the $29 level in the ultra s-t and prolly below MLCO's tgt price over the next weeks.

Market has shown some considerable resilience over the past weeks but I think it needs another shake-out. This dg may give the que.

Ah, and btw - Goldman downgraded Apple (NASDAQ:AAPL) this AM. Rating goes to Neutral from Buy with tgt lowered to $115.


dcxavier said...

That's an interesting call. JPM got about $220B in mortgages when they bought WaMu. At the time, WaMu reported about $8B in reserves and Tier 1 capital of 7.8%. JPM immediately took a $31B writeoff, which meant WaMu actually had negative Tier 1 capital. JPM stated at the time that they thought this was a worst case writeoff.

Now Merrill says it could be worse. Wonder if Merrill looked at the Countrywide books before making the call. Probably doesn't say much for BAC's prospects either. A last chance for Merrill's analysts to get a sharp punch in before the layoffs.

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