JPMorgan's shares declined 11% following CEO James Dimon's announcement after the market close last Thursday of the $2 billion trading loss -- partially offset by $1 billion in gains on available-for-sale securities -- through Tuesday's close at $36.24.
Guggenheim Securities analyst Marty Mosby said late on Tuesday that the market's reaction sets up major capital savings on share buybacks, "helping to offset the future impact of losses tied to this event."
"Since JPM could be about on track for the 2012 earnings outlook," Mosby said, the decline in the stock price "could reflect the expectation for future losses from this exposure," and "Assuming an 8x P/E multiple prior to this announcement, the incremental loss to pre-tax earnings in 2012 would have to be around $4 billion."Mosby also pointed out that "this loss would most likely be considered non-operating -- therefore affecting 2013 earnings only if share repurchase volume was reduced so that the capital position at year-end 2013 was not lowered." Guggenheim estimates "that JPM would have to experience close to $15 billion in pre-tax losses in order to push the share count up enough to pull down the 2013 estimate enough to justify the recent drop in JPM's stock price." Barring an earth shattering event like that, it would seem that the share price drop could represent a golden opportunity for JPMorgan Chase to take advantage of market conditions and benefit its shareholders. >>5 Banks to Buy After JPMorgan's Big Mistake Mosby "had forecasted that JPM would repurchase approximately 60 million shares per quarter," and said "the savings from this $10 reduction in stock price would be worth $600 million in saved capital," under that scenario, and "in comparison, last week's announced $1 billion in net losses could create a $650 million after-tax loss." While the loss is unfortunate, the market action is similar to what Berkshire Hathaway (BRK.B) CEO Warren Buffet said in this year's letter to shareholders. "When Berkshire buys stock in a company that is repurchasing shares, we hope for two events," Buffett said. "First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well."
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