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Buy JPMorgan Chase Now: Graseck (Update 1)

Updated with morning market action.

NEW YORK ( TheStreet) -- Saying "the share price will rise relative to the industry over the next 60 days," Morgan Stanley analyst Betsy Graseck on Thursday urged investors to buy shares of JPMorgan Chase (JPM - Get Report) ahead of the company's Analyst Day conference on Feb. 28.

Graseck called JPMorgan "the cheapest money center" bank, measured by price-to-earnings and price-to-book ratios, "when you factor in [return on equity]" and said the company was "best positioned for market share gains given its stronger credit rating, and it still has room to benefit from stronger credit as default servicing costs likely decline in 2012-13.

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JPMorgan's shares were down 1% in morning trading, to $37.81.

The analyst's price target for JPMorgan Chase is $42.00. The shares closed at $38.07 on Wednesday, returning 15% year-to-date, following a 20% decline in 2011.

JPMorgan's shares were trading for 1.2 times tangible book value according to HighlineFI, and for eight times the consensus 2012 earnings estimate of $4.66, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $5.44.

Here's a quick rundown on the same data for the rest of the "big four" U.S. bank club:
  • Shares of Bank of America (BAC - Get Report) closed at $7.95 Wednesday, returning 43% year-to-date, following a 58% decline in 2011. The shares trade for just 0.7 times tangible book value, but at a relatively high multiple of 11 times the consensus 2012 EPS estimate of 71 cents. That's the highest forward price-to-earnings ratio among the big four. The consensus 2012 EPS estimate is $1.20.
  • Shares of Citigroup (C - Get Report) closed at $32.36 Wednesday, returning 23% year-to-date, following last year's 44% decline. Like Bank of America, Citi trades for a low 0.7 times tangible book, but at a much lower multiple of eight times the consensus 2012 EPS estimate of $3.98. The consensus EPS estimate for 2013 is $4.76.
  • Wells Fargo was up 11% year-to-date, through Wednesday's close at $30.59. The shares trade for 1.8 times tangible book value, reflecting the company's status as the best and most consistent earner among the big four, with returns on average assets ranging between 1.11% and 1.27% over the past five quarters, according to HighlineFI. The shares trade for 10 times the consensus 2012 EPS estimate of $3.20. The consensus 2013 EPS estimate is $3.69.

Graseck matches the consensus, estimating JPMorgan will earn $4.66 a share in 2012, and is slightly behind the consensus, estimating 2013 EPS of $5.37, because of "less reserve bleed," but said she sees "potential for upward EPS revisions as JPM demonstrates share gains and efficiency saves."

The analyst bases her $42 price target for JPM on a "base case" that assumes the shares end up trading for 1.1 times tangible book value at the end of 2012 and that despite "sub-par economic growth" sees nonperforming loans continuing to decline through this year.

Graseck said mortgage loan default costs "were a 63c drag on earnings in 2011 (14% of eps)," and was "optimistically [looking] for JPM to dial back on these costs in 2012 (est down 35% y/y to 43c earnings hit or 10% of eps) as they push through foreclosure inventory" and work to meet the loan servicing improvement requirements of the Office of the Comptroller of the Currency, which are included with the broad foreclosure settlement announced on Feb. 9.

A "sum of the parts analysis implies [a] $48 share price for JPMorgan Chase," which is even higher than Graseck's price target, who also said that "JPM can take share in European deleveraging," boost its dividend on common shares to 3% (the current dividend yield is 2.63%, based on a 25-cent quarterly payout, and "has room to become more efficient."

In her discussion on JPMorgan's investment banking business, Graseck said that analysts will be looking for the company to provide details on Feb 28 about the effect of the Volcker Rule, which will place U.S. firms "at a significant disadvantage vs international peers if implemented as proposed."

The analyst forecasts "underwriting and advisory revenues to increase 27% in 2012," versus the company's annualized fourth-quarter results, but for these revenues to decline 3% year-over-year, because of the strong results in the first half of 2011.

Similarly, Graseck forecasts an 11% increase in trading revenues during 2012 from the annualized fourth-quarter results, but for trading revenues to decline 14% year-over-year.

For JPMorgan's card services, Graseck said analysts would want to know how much private label business the company was expecting to lose.

For Retail, housing is, of course, the name of the game, with JPMorgan expected to discuss on Feb. 28 its outlook for the U.S. economy to work through the "shadow inventory" of homes going through the foreclosure process.
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