JPMorgan Needs to Win Wall Street's Love Back

NEW YORK (TheStreet) -- While most analysts think the "London Whale" has been harpooned, some still see major challenges ahead for JPMorgan Chase (JPM) and its shareholders.

After JPMorgan on Friday announced a $5 billion second-quarter profit, including a $4.4 billion hedge trading loss by its Chief Investment Office (CIO) in the now-infamous "London Whale" incident, investors sent the shares up 6%, to $36.07.

JPMorgan Chase CEO James Dimon said during the company's earnings conference call that "we've significantly reduced the total synthetic credit risk in CIO," and that "hopefully, if all goes well, we can start buying back stock early in the fourth quarter," resuming the share buyback program that was suspended in May after the CIO hedge trading losses were first disclosed.

The second-quarter adjusted earnings of $1.09 a share -- excluding debit valuation adjustments (DVA) -- soundly beat the consensus estimate of 76 cents a share among analysts polled by Thomson Reuters, and most analysts followed up by raising their 2012 earnings estimates, while some raised their 2013 estimates as well. Increasing the current year earnings estimate following s better-than-expected second quarter is an obvious move and not likely to move the stock, but significant increases to forward earnings estimates can move the shares, which are trading quite low 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for seven times the consensus 2013 EPS estimate of $5.25.

Along with the prospect of having the CIO losses fading "to painful memory," according to Oppenheimer analyst Chris Kotowski, there were many bright spots in JPMorgan's second-quarter earnings release:

• Period-end commercial banking loans grew to $120.5 billion as of June 30, from $115.8 billion the previous quarter, and $102.7 billion a year earlier.
• Mortgage revenue increased to $2.3 billion during the second quarter, from $2.0 billion during the first quarter, and $1.1 billion in the second quarter of 2011.
• Total noninterest expense declined to $15.0 billion in the second quarter, from $18.3 billion the previous quarter, and $16.8 billion a year earlier, mainly reflecting a decline in litigation expenses, but also a reduction in compensation expenses to $7.4 billion, from $8.6 billion in the first quarter (the annual seasonal spike for bonuses), and $7.6 billion in the second quarter of 2011.

Most analysts remain positive on the JPMorgan story, with 23 out of 33 sell-side analysts polled by Thomson Reuters rating the shares a buy, with a mean price target of $44.84, implying 24% upside for the shares.

So why should investors stay on the sidelines or consider selling JPMorgan Chase, when the shares are so cheaply priced?

FBR analyst Paul Miller rates JPMorgan "Market Perform," with a price target of $37, and said on Monday that the company's second-quarter results "were strengthened by a mix of financial levers pulled by the company," to offset the trading losses, and that in addition to "material headwinds to earnings facing the company and the industry overall, including margin compression as a result of historically low interest rates," the "overhang of the ongoing LIBOR investigation may take the place of the CIO trading losses as the new 'unknown' that we believe may keep some investors on the sidelines."

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