Thursday, February 12, 2009

JP Morgan (NYSE:JPM): $26 An Attractive Entry Point - Morgan Stanley

Morgan Stanley is out this morning calling JP Morgan (NYSE:JPM) one of their highest conviction Overweights. Firm believes current valuation is an attractive entry point and highlight three reasons for buying the stock today:

1) JPM is one of the best positioned for a downturn due to a strong capital position (TCE/TA at 3.8% vs. 2.8% at BAC and 1.5% at Citi), high reserve coverage (1.8 years vs. 1.0 at BAC and 1.2 at Citi), and low NPLs (1.2% vs 1.7% at BAC and 3.2% at Citi).

2) One of the best positioned for an improvement in asset values. Fed activity should help drive
improving asset values, aiding the IB business. JPM is not looking to sell assets into the bad bank, but rather may be a buyer depending on price, structure and leverage.

3) Attractive Valuation. JPM is currently trading at 0.7x book value and 1.1x tangible book. It may not be as cheap as some peers, but it also doesn’t have the dilution risk, in firm's view. Additionally, while they are forecasting a 30% dividend cut, mgmt suggested they are unlikely to cut the dividend at this time.

What’s New: Yesterday’s meeting with JPM’s CFO Mike Cavanagh strengthens Morgan's conviction in their OW call on the stock. They came away believing JPM is one of the best positioned to weather the pressures of increased scrutiny and incremental tail risk in a deteriorating environment.

Investment Thesis: They are Overweight JPM. JPM has less exposure to the riskiest assets (subprime, resi construction, cdos) than peers, stronger capital position and stronger risk management. WM accretion puts them in relatively stronger position going forward.

Notablecalls: Whenever I need to make an upside bet in the financials I pick JPM to do the job. Not saying this call in outright actionable but underscores my thinking. JPM seems the safest.

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